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On 23 March 2020, the US Federal Reserve (Fed) launched the Secondary Market Corporate Credit Facility (SMCCF) — a special-purpose vehicle (SPV) designed to support the corporate-bond market in the face of the COVID-19 crisis. In late June, the Fed released an official list of its initial bond purchases made via this program.

The more I think about the Fed taking the unprecedented step of buying corporate bonds as part of its crisis-response arsenal, the more I believe it’s difficult to overstate the implications. Here are some of my latest thoughts on the matter.

Five thoughts on the program

In my view, the Fed’s corporate-bond-buying program:

  1. Minimizes tail funding risk. Many US corporate-bond issuers were distressed and deemed to be at risk of bankruptcy as recently as a few months ago. Then came the Fed’s bond-buying program, which is aimed at removing tail funding risk, primarily for corporates that “should” survive (based on their investment-grade ratings pre-COVID-19). The terms of the program have since been…
CORONAVIRUS
MACRO
Jeremy Forster
Fixed Income Portfolio Manager
Boston

In my last blog post, I discussed how China’s enthusiastic plunge into a digital economy is unleashing massive changes that are reshaping Chinese society and, along the way, creating a bounty of investment opportunities. Rapid digitalization, however, is only one of the forces driving this transformation. Even more potent change is occurring on the back of China’s 40-year-old, now-flourishing “innovation ecosystem.”

Lay of the landscape

Innovation is the advent of new ideas, technologies, business models, and products/services (Figure 1). Over the past 40 years of China’s transition to a market-driven economy, the conditions slowly developed for a vibrant innovation ecosystem to take root. The critical elements of this ecosystem — human capital, technical and experiential knowledge, and the institutions and incentives to promote an innovative culture — are relatively new in China, having only emerged over the past decade or so. (Before then, most “new” things that appeared in China were adaptations or copies of existing things.)

Figure 1

Innovation results in rising complexity and sophistication of the economy

Thus, the ecosystem has only recently become truly “innovative” and is just starting to produce meaningful results — a tsunami of new…

MACRO
MARKETS
Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong
Climate 101 is an ongoing series designed to enhance basic understanding of climate change from an investment point of view, and to communicate our current research themes and areas of focus for our clients.

Carbon emissions from the production and consumption of fossil fuels are the primary cause of climate change. Increasing atmospheric concentrations of greenhouse gasses (GHGs) are changing climate patterns, warming the earth’s surface, and exacerbating physical climate risks. Signatories of the 2016 Paris Agreement named reducing heat-trapping emissions as the most important step in reaching their goals. Since then, governments, companies, and market participants have been aiming to quantify, benchmark, and track emissions associated with their activities. Here we offer a high-level description of carbon emissions and describe industry efforts to standardize their…

SUSTAINABILITY
Chris Goolgasian
Chris Goolgasian
CFA, CPA, CAIA
Director of Climate Research
Boston
Julie Delongchamp
Julie Delongchamp
CFA
Climate Transition Risk Analyst
London

In many ways, the COVID-19 crisis has fundamentally altered the way we live and work (and continues to do so). From an investment standpoint, that has been a big catalyst for long-term value creation across certain sectors. The technology sector is a notable case in point.

A day in the life of a tech analyst

To illustrate, consider how my own life has changed over the past several months:  

  • I do my job from my home office in my living room these days — investing, researching, collaborating. The transition to working remotely has been seamless.
  • Not only am I just as productive as I was in the office, but I save time and money by not having to commute every day.
  • Meanwhile, I can “go to” a doctor’s appointment without leaving my house, using telemedicine capabilities.
  • I can do all my banking online, with the same functionality as if I went to a physical branch location.
  • I can shop online using my mobile wallet and have my groceries or other purchases delivered to my door.
  • After calling it a day, I can spend the evening watching a movie of my choice or playing a video game.

All of this is enabled by technology. None of it is new per se, but what has changed on the back of COVID-19 is the speed and alacrity with which…

THEMES
Bruce Glazer
Global Industry Analyst
Boston

By its very nature, the financials sector is a highly macro-exposed area of the equity market. As we have already witnessed over the past several months, what happens on the global macroeconomic front as a result of the COVID-19 crisis will directly impact financial stocks.

The rub, of course, is that no one really knows what will happen from here. Indeed, there is considerable uncertainty around the global macro outlook, with a wide range of potential economic outcomes in play. Financials generally don’t like macro uncertainty, and that’s reflected in the discounted valuations of many such stocks (particularly more balance-sheet-oriented companies like banks and life insurers). In effect, broadly speaking, I believe the sector offers a…

MARKETS
THEMES
Andrew Heiskell
Andrew Heiskell
Global Industry Analyst
Boston
  • The COVID-19 new case count continues to drift higher globally and has now hit a seven-day moving average of approximately 213,000/day (see Figure 1 in full post). COVID-related deaths have also increased, but more modestly — to around 4,900/day, from 4,500 at the start of July.
  • The daily new case count in emerging market (EM) countries is still trending upward, having now reached about 116,000 new cases/day.
  • New developed market (DM) cases are lower at 69,000/day, but are rising faster than in EMs. The DM new case count has now surpassed the 65,000/day peak of the first wave.
  • Notably, the acceleration in the number of new DM cases is almost entirely a US-driven phenomenon — around 62,000 new cases/day in the US, up from 51,000/day a week ago. (Continue reading full post for more on this.) 
  • There has also been a reacceleration of new-case-count numbers, from a very low base, in developed Asia. This has been driven largely by…
CORONAVIRUS
Bob Deresiewicz
MD
Global Industry Analyst
Boston
  • A town in Siberia near saw the mercury hit 38°C (100.4°F) in June.
  • May 2020 tied for the warmest May on record, globally.
  • In Florida, heat and humidity levels are breaking overnight high-minimum records.

Highs are getting higher

The assumption that the planet needs to warm by an average of 2°C before heat becomes an issue obscures the risks of extreme heat. Abnormally high temperatures during heat waves or planting and harvest seasons can be devastating. According to projections, within the next few decades, numerous regions will experience many more days with average daytime temperatures over…

SUSTAINABILITY
Chris Goolgasian
Chris Goolgasian
CFA, CPA, CAIA
Director of Climate Research
Boston
Jenny Xie
Jenny Xie
Investment Science Associate
Boston

Most of our inflation gauges suggest the figure is likely to fall towards zero in the next 6 – 12 months. But I think the ingredients are coming together to make higher global inflation (>3%) in the next 3 – 10 years more likely. I also expect the UK to be a bellwether for the higher longer-term inflation to come, given its recent history and the UK’s unique characteristics.

Six reasons why inflation should be higher in the next 3 – 10 years

I think there will be a series of negative supply shocks as there is likely to be:

  1. Less imported deflation due to stalling global trade and a larger services proportion of CPI baskets.
  2. A greater emphasis on local rather than global resources because supply chains will increasingly become localised and the government’s objective will be to protect national labour markets.
  3. Continued low productivity as governments will likely become more active at directing resources within economies and protecting…
MACRO
MARKETS
John Butler
John Butler
Macro Strategist
London
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