#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.”

In my last blog post, I asked, “Is this the end of secular stagnation?,” which I defined as low nominal economic growth due to insufficient aggregate demand. While I didn’t (and still don’t) have a simple “yes” or “no” answer, I shared my latest thinking on the topic, including some investment positioning ideas for clients.

This time, I’d like to look more closely at one of the main causes of secular stagnation — a global “savings glut” over the past decade-plus — and whether it’s likely to persist going forward.

How did we end up with a savings glut?

Outside the US, the “savings glut” to which I refer dates back to before the 2008 global financial crisis (GFC). Following the GFC, the US also began to accumulate…

MACRO
THEMES
Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston

In my 2020 insight, “Debunking four common myths about CLOs,” I highlighted what I saw at the time as compelling value in several tranches of the collateralized loan obligation (CLO) market. Looking at recent CLO spreads and valuations, I believe that remains the case as of this writing.

CLO spreads rebounded quickly from last year’s COVID-19-induced sell-off. Despite spread tightening across the capital structure over the past year, I still find CLOs attractive versus competing asset classes, such as corporate credit (Figure 1)…

Figure 1

CLO spreads vs corporate credit spreads

…especially in light of my positive outlook for CLO fundamentals. As the market has recovered, the underlying bank loan collateral credit metrics have…

MARKETS
Alyssa Irving
Alyssa Irving
Fixed Income Portfolio Manager
Boston

Recently, a few people have asked me a version of: “So, when will we start to see some climate events?” I can interpret this question in one of two ways. They either believe worsening hurricanes, wildfires, floods, and other climate events are simply bad weather, or they are displaying a cognitive bias, where bad memories associated with disturbing events fade quickly.

Investors risk becoming desensitized to the increasing frequency and severity of climate-related events and discounting the long-term consequences for capital markets of a changing climate. It would be difficult to dismiss the many record-breaking (and near-record-breaking) climate events that occurred in 2020 (and recent years) as a spate of “bad weather.” Devastating hurricanes, floods, and wildfires are occurring more frequently, and climate models project similar increases in the probability of…

SUSTAINABILITY
Chris Goolgasian
Chris Goolgasian
CFA, CPA, CAIA
Director of Climate Research
Boston

How to incorporate environmental, social, and governance (ESG) research and ratings into fundamental security analysis can be a vexing question for investors. The connection of ESG issues to equity returns isn’t always clear and disconnects can persist for companies that screen well on fundamentals but poorly on ESG. As ESG-focused investors with extensive fundamental investing experience, here are some ways we help our colleagues think about applying ESG to their investment process.

Yolanda’s perspectives

Look for red flags. I see ESG as a cost-of-equity scaler. The more material ESG red flags there are, the more concerns the market may have about a company’s financial risks. These concerns can reduce the likelihood for strong fundamental performance to translate reliably into strong share-price performance over the long term. Conversely, the more a company’s ESG profile improves and concerns abate, the more the stock’s…

 

SUSTAINABILITY
Yolanda Courtines
Yolanda Courtines
CFA
Equity Portfolio Manager
London
Mark Mandel
Mark Mandel
CFA
Equity Portfolio Manager
Boston

The number one question most cash investors are asking themselves (and us) these days is: How long are we going to be stuck in this “zero-bound” range for short-duration interest rates? Here are our latest thoughts on that and related matters.

  • All eyes on short-term rates: We expect the short end of the US yield curve to remain anchored lower for the foreseeable future, but we believe the risks are skewed to the upside in the second half of 2021 due to COVID-vaccine progress, a gradually reopening (and recovering) economy, and the massive amounts of fiscal and monetary stimulus already flowing through the system. Those factors may result in mounting inflationary pressures in the months ahead, which in turn could lead the market to begin pricing in higher short-term rates (i.e., a potential Fed rate hike) sooner than currently anticipated.
  • No Fed? No problem: As of year-end 2020, the permanent closure of some of the US Federal Reserve (Fed) lending facilities that were created by the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act —particularly the credit facilities (PMCCF and SMCCF) and TALF — removed…

 

MARKETS
Caroline Casavant
Caroline Casavant
Investment Analyst
Boston
Andrew Bayerl
Andrew Bayerl
CFA, CAIA
Investment Director
Boston

The short answer is no, but it’s not completely hyperbolic to suggest we could be heading in that direction longer term.

Several of my Wellington colleagues and I are collaborating on an ongoing macroeconomic and geopolitical research project around the theme of “Biden and the world.” This blog post encapsulates some of my latest contributions to that effort, with a focus on the US-China relationship and the latter country’s growing role on the world stage.

China could become the world’s largest economy on President Biden’s watch.

According to the International Monetary Fund, the US was the world’s biggest economy as of year-end 2020, with a nominal gross domestic product (GDP) of US$20.8 trillion, followed by China at US$14.9 trillion. However, a December 2020 report by the Centre for Economics and Business Research stated that the size of China’s economy could surpass that of the US by…

MACRO
THEMES
Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

The dramatic 2020 US election is finally behind us, but 2021 is not lacking in global political activity of which investors should be aware. For example, the new year brought a busy docket of upcoming elections across various emerging markets (EM) countries. Figure 1 provides our EM debt team’s 2021 election calendar and assessment of the risk of populism in each case.

FIGURE 1

2021 EM elections calendar

Important takeaways

  • Across large parts of the EM landscape, economic growth had already been weak for several years leading up to the COVID-19 crisis. We believe the pandemic’s…
MACRO
Tushar Poddar
Tushar Poddar
PhD
Macro Strategist
London

The widespread economic fallout from the COVID-19 crisis dealt a formidable challenge to many municipal bond issuers’ ability to maintain and improve their credit quality. Given the need for state-level lockdowns and the subsequent realization that a return to pre-pandemic activity would take much longer than anticipated, the outlook as of mid-2020 pointed to an extremely trying period for the municipal bond market.

However, a combination of factors came together over the course of the year that led to more benign conditions than initially feared and set the stage for many better-than-expected credit outcomes. While some municipal credits have been downgraded since the pandemic began, most have…

MARKETS
Conor McEachern
Conor McEachern
Fixed Income Credit Analyst
Boston
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