#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.”

ARCHIVE

Archived posts remain available on this page. Please consider the publish date while reading these older posts.

What would Winston Churchill say today?

It would be interesting to hear Churchill’s thoughts on the current crisis. Sadly, we will never know, but we do know he didn’t think much of currency traders:
“There is no sphere of human thought in which it is easier for a man to show superficial cleverness and the appearance of superior wisdom than in discussing questions of currency and exchange.”

With those stinging words ringing in my ears, here are my thoughts on currencies in the current environment.

The euro faces existential threat

I think the euro will face an existential moment in the coming weeks. That can be avoided if the eurozone countries move to risk-sharing and towards a full fiscal transfer mechanism. Since adopting the single currency, Italy has hugely underperformed (30% below the average level of GDP of other member states, as we enter this crisis) and has suffered high…

CORONAVIRUS
MARKETS

ARCHIVED

John Parsons
Currency Portfolio Manager
London

During this period of unprecedented upheaval and disruption, some companies will rise to the challenge of the moment, while others will not. In many cases, their most enduring actions — and the ones that help them survive — will include ESG decisions as well as financial ones. How are companies ensuring employees’ safety? What benefits are they providing? How are they treating customers and communities? Are they evaluating the resilience of their supply chains?

During our engagement calls with executives and boards, we are asking questions like these to understand how each company is responding to the COVID-19 crisis and considering all its stakeholders. I’ve included a few of our investors’ insights here.

Carolina San Martin, CFA
Director, ESG Research

On a recent energy-company call, it was clear that the board and management have increased their focus on employees in light of the COVID-19 crisis. While they didn’t rule out…

CORONAVIRUS
SUSTAINABILITY

ARCHIVED

Wendy Cromwell
Wendy Cromwell
CFA
Vice Chair, Director of Sustainable Investment, and Portfolio Manager
Boston

While obviously a challenging market environment, we believe that high-yield bond and bank-loan spreads, in the 97th and 98th percentiles, respectively (as of this writing), could more than compensate investors for forward-looking potential credit losses.1

  • In the case of bank loans, an average market price of around 782 seems to imply that investors are expecting more than 50% of the market to default. However, the worst five-year cumulative default rate for loans historically has been 25.3%.3
  • Additionally, investing in high yield at spreads over 1,000 basis points (bps) and then staying invested for three or more years has historically produced annualized total returns of at least 14%.4
  • As a result, despite today’s challenges, we believe there may be…
CORONAVIRUS
MARKETS

ARCHIVED

Key takeaways

  • The ECB has shed most of the remaining constraints on purchases. It will be able to support an aggressive expansion of sovereign issuance this year.
  • The eurozone’s fiscal response lags behind, but will catch up over the coming weeks as growth deteriorates.
  • Eurozone political leaders will likely eventually endorse using the European Stability Mechanism (ESM), but will need to go further.

ECB’s pandemic emergency measures

The ECB has published details of its €750 billion Pandemic Emergency Purchase Programme (PEPP).

When the decision was made last week, the ECB stressed the flexibility of its implementation. This decision is the practical implementation of that:

  • Greece is included in the programme.
  • The 33% limit on the share of eurozone members’ bonds that the ECB will hold under its existing programmes does not apply to the PEPP.
  • The ECB can buy across the yield curve, from very short maturities (down to 70 days) to very long ones.
  • The ECB has accepted pari-passu treatment in the event of a sovereign-debt restructuring.

Few constraints remain

The last three points were news, I believe, and demonstrate that the ECB will disregard past constraints in order to respond to the pandemic. The remaining constraint is that the purchase amounts are guided by the ECB’s capital key, which…

CORONAVIRUS
MACRO

ARCHIVED

Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

At times like this, it never hurts to dust off basic, time-tested principles — like the importance of staying invested through thick and thin — that even sophisticated investors may lose sight of when fear takes hold. While we don’t yet know how long the COVID-19 crisis will last, the extent of its economic impact, or when markets will bounce back, here’s what we do know.

  • Investor returns would have suffered greatly from missing the market’s best days. The MSCI World Index1 returned 7.52% annualized for the 15 years ended December 2019, but investors who missed the 10 best days from that period would have earned less than half…
CORONAVIRUS
MARKETS

ARCHIVED

Matthew Bullock
Investment Director
London
Load More

DISCLOSURES

Wellington Management Company LLP (WMC) is an independently owned investment adviser registered with the US Securities and Exchange Commission (SEC). WMC is also registered with the US Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA) and serves as a CTA to certain clients including registered commodity pools and their operators. WMC provides commodity trading advice to all other clients in reliance on exemptions from CTA registration. WMC, along with its affiliates (collectively, Wellington Management), provides investment management and investment advisory services to institutions around the world. Located in Boston, Massachusetts, Wellington Management also has offices in Chicago, Illinois; Radnor, Pennsylvania; San Francisco, California; Beijing; Frankfurt; Hong Kong; London; Luxembourg; Singapore; Sydney; Tokyo; Toronto; and Zurich. ■ This material is prepared for, and authorized for internal use by, designated institutional and professional investors and their consultants or for such other use as may be authorized by Wellington Management. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients.In Canada, this material is provided by Wellington Management Canada ULC, a British Columbia unlimited liability company registered in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, and Saskatchewan in the categories of Portfolio Manager and Exempt Market Dealer. ■ In Europe (ex. Austria, Germany and Switzerland), this material is provided by Wellington Management International Limited (WMIL), a firm authorized and regulated by the Financial Conduct Authority (FCA) in the UK. This material is directed only at persons (Relevant Persons) who are classified as eligible counterparties or professional clients under the rules of the FCA. This material must not be acted on or relied on by persons who are not Relevant Persons. Any investment or investment service to which this material relates is available only to Relevant Persons and will be engaged in only with Relevant Persons. ■ In Austria and Germany, this material is provided by Wellington Management Europe GmbH, which is authorized and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). This material is directed only at persons (Relevant Persons) who are classified as eligible counterparties or professional clients under the German Securities Trading Act. This material does not constitute investment advice, a solicitation to invest in financial instruments or information recommending or suggesting an investment strategy within the meaning of Section 85 of the German Securities Trading Act (Wertpapierhandelsgesetz). ■ In Hong Kong, this material is provided to you by Wellington Management Hong Kong Limited (WM Hong Kong), a corporation licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), and Type 9 (asset management) regulated activities, on the basis that you are a Professional Investor as defined in the Securities and Futures Ordinance. By accepting this material you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. ■ In Singapore, this material is provided for your use only by Wellington Management Singapore Pte Ltd (WM Singapore) (Registration Number 201415544E). WM Singapore is regulated by the Monetary Authority of Singapore under a Capital Markets Services Licence to conduct fund management activities and is an exempt financial adviser. By accepting this material you represent that you are a non-retail investor and that you will not copy, distribute or otherwise make this material available to any person. ■ In Australia, Wellington Management Australia Pty Ltd (WM Australia) (ABN 19 167 091 090) has authorized the issue of this material for use solely by wholesale clients (as defined in the Corporations Act 2001). By accepting this material, you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. Wellington Management Company LLP is exempt from the requirement to hold an Australian financial services licence (AFSL) under the Corporations Act 2001 in respect of financial services provided to wholesale clients in Australia, subject to certain conditions. Financial services provided by Wellington Management Company LLP are regulated by the SEC under the laws and regulatory requirements of the United States, which are different from the laws applying in Australia. ■ In Japan, Wellington Management Japan Pte Ltd (WM Japan) (Registration Number 199504987R) has been registered as a Financial Instruments Firm with registered number: Director General of Kanto Local Finance Bureau (Kin-Sho) Number 428. WM Japan is a member of the Japan Investment Advisers Association (JIAA), the Investment Trusts Association, Japan (ITA) and the Type II Financial Instruments Firms Association (T2FIFA). ■ WMIL, WM Hong Kong, WM Japan, and WM Singapore are also registered as investment advisers with the SEC; however, they will comply with the substantive provisions of the US Investment Advisers Act only with respect to their US clients.