#WellSaid

The Wellington Blog — A diverse marketplace of ideas, where our investment professionals share and challenge each other’s views. They decide independently how to draw on those ideas to sharpen their investment decisions, unconstrained by any single “house view.”

Japan has experienced deflation for much of the past 30 years (Figure 1). That’s the general consensus, so why my titular question? Because what Japan has not had over the past three decades is the sort of broad wage-service deflation that is most feared by economists. Instead, I would characterise Japan’s deflation as having been mostly idiosyncratic in nature.

Figure 1

Is Japan's deflation cycle at the end?

Deflation was mostly idiosyncratic

Japan’s protracted battle with deflation was largely attributable to specific dynamics, including the country’s botched policy response to its 1980s asset-price bubble, whose collapse in 1991 ushered in Japan’s so-called “lost decade” — a period of economic stagnation that lasted until 2001. In addition, I believe the massive…

MACRO
THEMES
Paul Cavey
Paul Cavey
Macro Strategist
Hong Kong

Factor investing – tilting a portfolio toward securities that have certain attributes (e.g., attractive value, quality, momentum, etc.) – has become widely accepted and practiced in the world of equities. Within fixed income, it is in a more nascent stage.

However, we believe that applying a factor-based investing framework can lead to valuable insights into what is driving performance in different sectors of the bond market. Even more important, it may allow investors to better position their portfolios to take advantage of…

MARKETS
THEMES
Brendan Fludder
CFA
Research Manager
Boston
Samuel Steere
CFA
Investment Director
Boston

With an unstable relationship between the US and China looking like a long-term geopolitical reality, pressure to relocate manufacturing away from China is growing. Could neighbouring India, which has a similar population size and rate of economic growth, be positioned to benefit from the shift?

I believe this is not a realistic expectation. Understanding why requires a quick recap of India’s industrial history.

Constructing — and dismantling — the socialist edifice

In the decades after India gained independence in 1947, while East Asia was opening up to the rest of the world, Indian manufacturing stagnated under a series of protectionist trade policies and a socialist industrial model that stifled competition, discouraged innovation and encouraged downsizing rather than expansion. Labour was protected to the point of dysfunction, while education and skills languished in the hands of a corrupt and inefficient bureaucracy. India’s location did not help — in a historically poor region far from key sea routes, with poor connections with the West and East Asia.

Reform came in the early 1990s when a spike in oil prices sparked by the Gulf War coincided with a trough in remittances from Indians in the Gulf. With FX reserves for imports and debt servicing running dangerously low, a desperate Indian government secured an emergency loan from the International Monetary Fund in 1991. In exchange, the government implemented sweeping reforms to open up the economy.

By the 1980s, India’s growth was accelerating fast. But it was arguably too…

MACRO
Tushar Poddar
Tushar Poddar
PhD
Macro Strategist
London

When I think of “old school” emerging markets (EMs), I think of Mexico. What started out as an exercise to determine if Mexico could be a “Biden trade” soon turned into my belief that some Mexican equities could perform well going forward regardless of the election outcome.

Mexico is not a “COVID reopening” trade, in my view, because President Andrés Manuel López Obrador (AMLO) neither locked the country down aggressively amid the pandemic, nor took any bold steps to stimulate the market. In fact, by not pursuing deficit spending in response to COVID, Mexico’s balance sheet may hold up better than most EMs’ heading into 2021.

More to the point for investors, some Mexican companies appear to be pivoting toward…

MARKETS
THEMES
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

I was recently asked, “How can you be confident that value investing will work again, when the historical results look so skewed to growth?” It’s a fair question. Looking at the Russell 1000 Growth and Value indices, growth is ahead on a one-, three- five-, 10-, and 30-year basis, and indeed since 1978, when data is first available. Among the most striking results are the one-year returns (37.5% for growth and -5.0% for value) and the 10-year annualized returns (17.3% for growth and 9.9% for value).1

However, these numbers mask how quickly the picture has shifted. As recently as February, value was beating growth since inception. And before the global financial crisis, value was ahead by more than 2% annually over almost three decades since 1978. Perhaps more importantly, there has been a strong cyclicality to the performance of growth and value that makes some “extreme” periods seem a bit more ordinary.

Haven’t we been here before?

In 1999 and 2000, growth was beating value since inception — and on a trailing one-, three-, five-, 10- and 20-year basis. Then, too, investors were asking, “Is value dead?” But value was…

MARKETS
Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston

1. When might a COVID vaccine become available?

In light of the recent positive news on the COVID vaccine front, it is possible that a vaccine could be authorized for use in the US as early as late 2020. Additional vaccines could be authorized or approved during the first quarter of 2021.

The logistics of vaccine distribution will be daunting. Under Operation Warp Speed, vaccine developers have already been manufacturing vaccine inventory at some risk, in anticipation of favorable efficacy and safety data. Nevertheless, the immediate demand will likely far exceed the initial supply.

Priority will be given to high-risk health care workers and first responders; then to people of all ages with comorbid conditions that put them at elevated risk of poor outcomes, along with older adults living in crowded circumstances; then to all adults over age 65; and so on. It’s likely to be well into 2021 before everyone in the US can be offered a vaccine.

2. What’s the prognosis for those infected?

It’s a moving target and depends on several factors, including the underlying health and age of the patient, the ever-improving medical knowledge of optimal case management, and the availability of medications active against the virus.

The observed death rate from COVID-19 has dropped considerably since the pandemic first reached the US and now stands at…

CORONAVIRUS
THEMES
Bob Deresiewicz
Bob Deresiewicz
MD
Global Industry Analyst
Boston
Wen Shi
PhD, CFA
Global Industry Analyst
Boston, MA

The short answer is not right now, but potentially down the road. And I believe it’s less about how high inflation can go than it is about the portfolio implications of even moderately higher global inflation, which investors haven’t experienced for most of the past 30 years.

It may seem odd to talk about inflation these days. However, the substantial level of coordination between monetary and fiscal policymaking following the COVID-19 shock, with many central banks providing ample space for fiscal stimuli by buying up newly issued debt, has led to inflation coming up in many discussions with clients lately. A string of recent data releases has also helped put inflation risk back on some clients’ radars.

Nonetheless, I think it’s fair to say that many clients remain to be convinced that inflation poses a real threat to their investment portfolios, particularly because…

MACRO
Nick Samouilhan
Nick Samouilhan
PhD, CFA
Multi-Asset Strategist
Singapore

Did you know?

  • Renewables are expected to meet nearly 30% of power demand in 2023.1
  • Efficient production and use of materials could help cut CO2 emissions by 25 gigatons.2
  • The world consumed 92.1 billion tons of material in 2017.3

Amid recent natural disasters and growing awareness, climate change has become a focus of social discourse, and we believe the ranks of market participants seeking solutions are growing. Many impact issuers contribute to environmental sustainability and help society better prepare for climate change. Here we share some of the environmental and climate-related innovations we are…

SUSTAINABILITY
Tara Stilwell
Tara Stilwell
CFA
Equity Portfolio Manager
Boston
Campe Goodman
Campe Goodman
CFA
Fixed Income Portfolio Manager
Boston
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