#WellSaid

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The 1970s were a memorable time for music, but many consumers and investors alike (at least those old enough to remember) might just as soon forget the economic “stagflation” — that toxic combination of flagging growth and soaring inflation — that plagued much of the decade. Forty-some years later, the specter of stagflation has resurfaced, as COVID-related supply-chain disruptions have persisted longer than expected and have converged with expansionary government policy (both monetary and fiscal) to push global inflation meaningfully higher in recent months.

As of this writing, the core Consumer Price Index (CPI) had reached levels well above its 20-year average range, even as GDP growth and many other leading economic indicators had weakened. Rising wages and energy prices have poured fuel on the fire, helping to create those unwelcome echoes of the 1970s — which, not surprisingly, were marked by generally poor real investment returns for…

For many asset owners, decarbonizing their investment portfolio has become a key policy objective supported by internal stakeholders. Debate persists, however, about how to most effectively do this. While exclusions may seem like the simplest solution, all divestment policies have tradeoffs.

1. Real-world impact is unclear

  • While fossil fuel exclusions can rapidly reduce a portfolio’s carbon footprint, their effect on real-world economic decarbonization takes much longer. High-emitting assets may continue to operate long after an asset owner exits a position. And, as more emissions-focused shareholders divest, company management teams may feel less pressure to decarbonize.
  • Emerging markets (EMs), which are significant fossil-fuel producers and consumers, typically have fewer transition resources. Limiting capital flows to EM-domiciled assets may…
SUSTAINABILITY
Erika Murphy
CFA, CAIA
Investment Director
Boston

2021 was, by all accounts, a good year for convertible bonds (“convertibles”). Despite bouts of volatility along the way, both US and global convertibles posted positive total returns last year, comfortably outpacing many other fixed income market sectors — including sovereign government bonds, as well as high-yield and investment-grade corporates.

Looking forward, we believe convertibles may continue to prove resilient, potentially benefiting from their distinctive structure amid the anticipated inflationary and rising-rate environment of 2022. Here are those three predictions for the year ahead.

Prediction 1: Convertibles to outperform both investment-grade and high-yield bonds

Since 1998, convertibles have outperformed both the Bloomberg US Aggregate Bond Index and the Bloomberg US Corporate Index in every period when interest rates rose by…

MARKETS
Dunkelberger, Raina
Raina Dunkelberger
CFA
Investment Specialist
Boston
Barry, Michael
Michael Barry
Fixed Income Portfolio Manager
Boston

Barring unforeseen macro or market developments, we believe the bank loan asset class looks poised to deliver positive total returns in 2022. Here’s why:

Inflationary pressures have raised the risk of tighter monetary policy

As we move into 2022, inflation risks remain paramount from an investment standpoint. We expect many investors to grapple with the potentially adverse effects on their portfolios, particularly as ongoing repercussions from the COVID-19 pandemic continue to exacerbate labor shortages and supply chain disruptions worldwide. Broadly speaking, we think mounting inflationary pressures have ratcheted up the risk of tighter monetary policy on the part of the US Federal Reserve (Fed) and…

MARKETS
Jeffrey Heuer
Jeff Heuer
CFA
Fixed Income Portfolio Manager
Boston
Dave Marshak headshot
David Marshak
Fixed Income Portfolio Manager
Boston
Nick Leichtman
Nick Leichtman
CFA
Investment Specialist
Boston

The past several months have seen a flurry of activity in the official sector1 regarding US Treasuries, as policymakers and stakeholders attempt to explain the startling dislocations that hit the Treasury market — generally considered to be the world’s deepest, most liquid securities market — in March 2020.

Indeed, it was only through swift, aggressive intervention by the US Federal Reserve (Fed) that said market dislocations did not become even more pronounced. It marked the second time in just a few years that the central bank had to intervene in the Treasury market to restore and encourage orderly operations — the other time being the Fed’s purchase of T-bills in the fall of 2019, which was designed to stabilize the short-term interest-rate market.

Understanding what happened in March 2020

So what led to the Treasury market dislocations and illiquidity back in March 2020? At a high level, the prevailing narrative is that…

MACRO
MARKETS
Amar Reganti
Amar Reganti
Investment Director
Boston

Climate change will continue to be an increasingly dominant theme as global climate-related regulation accelerates, disclosures such as the CDP (formerly the Carbon Disclosure Project) and the Task Force on Climate-related Financial Disclosures become more standardized (and in some regions, mandatory), and investor focus on the climate intensifies. In this short piece, we highlight how this impacts private companies and share our top questions for companies to be prepared to address as this issue grows.

Rising climate risks and investor expectations

In our view, companies across all sectors and stages should incorporate thoughtful approaches to climate change into their business models. This includes building resilience for the accelerating transition to a low-carbon economy and the worsening physical events exacerbated by climate change. Many companies overlook and/or underreport climate-related risks and opportunities that can be…

MARKETS
SUSTAINABILITY
THEMES
Hillary Flynn
Hillary Flynn
Director of ESG, Private Investments
Julie Delongchamp
Julie Delongchamp
CFA
Climate Transition Risk Analyst
London

As foreshadowed by US Federal Reserve (Fed) Chair Jerome Powell in his recent congressional testimony, as well as by other Fed officials, the Federal Open Market Committee (FOMC) yesterday accelerated the timeline for tapering its large-scale asset purchase program. The Fed’s monthly purchases of US Treasuries and agency mortgage-backed securities (MBS) will decline at a faster pace over the next few months, before coming to an end in March 2022. The culprit: rising inflation.

US inflation has been running persistently higher than both the Fed’s forecasts and its target range and has shown signs of broadening out across more goods and services. In response, the FOMC increased its inflation forecasts while also decreasing its growth outlook, as labor shortages and supply-chain bottlenecks have created greater inflationary pressures than the FOMC previously anticipated. The mounting inflationary risks also led the median FOMC participant to now expect the FOMC to hike interest rates three times in 2022 and three times in 2023. The US Treasury yield curve flattened following the release of the FOMC’s revised summary of economic projections, as the front end of the curve moved higher.

When will the Fed start reducing its balance sheet?

While not an imminent risk, market participants will eventually turn their attention to the timing of the Fed’s upcoming…

MACRO
Jeremy Forster
Jeremy Forster
Fixed Income Portfolio Manager
Boston

Investor enthusiasm for Japanese equities has long been dampened by the downward trend in the market during the 1990s and 2000s, as well as by structural challenges ranging from deflation to weak corporate governance. But we think this is an opportune time to consider a Japanese equity allocation, as we see seven potential positives that seem underappreciated by the market:

  1. Macroeconomics — recovering from COVID: While we’ll have to keep an eye on the Omicron variant, higher-frequency data suggests the economy has been regaining momentum since the Delta-variant-induced “state of emergency” status was lifted at the end of September. While an economic-surprise indicator for the country is currently very low, we think it has likely troughed.
  2. Monetary policy — benefiting from global inflation: While many developed market countries are struggling with excessively high core inflation (particularly the US), Japan has some way to go before core inflation will require…
MARKETS
Daniel Cook
Daniel Cook
CFA
Investment Strategy Analyst
Steven Ye
Steven Ye
CFA
Investment Strategy Analyst
Singapore
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