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Our investment professionals share and challenge each other’s views, creating a diverse marketplace of ideas for the Wellington Blog.

As China’s role on the world stage continues to loom larger, many investors are contemplating whether to separate the country from the rest of their emerging markets (EM) equity allocation. Most arguments for such separation are based on China’s fast-growing weight in broad EM equity benchmarks, but it’s not necessarily that simple. Let’s take a closer look.

The answer? It depends

We believe the key decision point here should not be China’s dominance of the EM indices, but rather, the extent to which a stand-alone China equity allocation can be viewed as similar (or dissimilar) to an EM ex-China equity allocation. If they are, in effect, more or less the “same thing,” then the relative size of one to the other will likely make…

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Samouilhan_Nick
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore
Cara Lafond
Cara Lafond
CFA
Multi-Asset Strategist
Boston
Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston

Sustainable investing is no longer the exclusive domain of equity investors. Indeed, there is a growing consensus that sustainability can be just as critical to investment outcomes in fixed income markets. Although environmental, social, and governance (ESG) integration and adoption have historically been slower in fixed income as compared to equities, investor demand for “green bonds” and other sustainable fixed income solutions has risen rapidly in recent years, particularly since the onset of COVID-19. Accordingly, the pace of new product innovation and proliferation has picked up as well.

Case in point: The booming global market for green/sustainability bonds has now expanded to convertibles — hybrid bonds that can be converted from debt into equity. While European debt issuers have thus far comprised most of the volume in these green, sustainability-linked, and/or social bonds, US and Asian issuers have become increasingly active in the space. The recent uptick of issuers selling green/sustainability convertible bonds includes companies focused on…

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SUSTAINABILITY
Raina Dunkelberger
Raina Dunkelberger
CFA
Investment Specialist
Boston
Michael Barry
Michael Barry
Fixed Income Credit Analyst
Boston

Question: Could rising “short-termism” actually provide an alpha opportunity for longer-term-oriented equity investors? Ironically, yes in my view. Let’s look at today’s financial technology (fintech) sector as an illustrative example.

Froth in fintech IPOs

I’m concerned about growing froth in the fintech initial public offering (IPO) market because much of the recent activity there signals that investors are continuing to take on more and more risk in pursuit of hoped-for near-term rewards. Here are some behaviors that, to me, highlight the potential for…

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Matt Ross
CFA
Global Industry Analyst
Boston

With US stocks notching record highs this year, significantly outperforming their Japanese counterparts, the spread between the two equity markets’ valuations has widened meaningfully in recent months (Figure 1).

Why the performance dispersion? Japan’s relatively slower COVID vaccine rollout and the disappointing lack of economic support provided by the (previously) much-anticipated Summer Olympics have clearly weighed on market sentiment of late, but equity investors’ apathy toward Japan actually dates back several years. One might even say that it has become entrenched.

The good news? The valuation gaps between Japan equity and its global peers have arguably reached…

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Jun Oh
Equity Portfolio Manager
Hong Kong

In their June 2021 paper, Why fragility is the new reality for the stock market, our colleagues Brian Hughes and Gordy Lawrence conclude that: ”An imbalance has developed between the supply of and demand for liquidity, and as a result we’ve seen a significant increase in the potential for the public equity market to jump from a state of calm to one of chaos.”

Within our global trading department, we couldn’t agree more. Here are our latest thoughts from a trading perspective on ways to potentially navigate those states of “chaos” that may arise, often unexpectedly, amid market shocks or bouts of heightened…

Plagued by a combination of disappointing returns, heightened volatility, global trade wars, and (most recently) the COVID-19 crisis and regulatory uncertainty, emerging markets (EM) equities have been decidedly unpopular with many investors for years now. But during that time, the EM investment opportunity set has grown and expanded significantly, making EM equities fertile ground for investors seeking enhanced portfolio diversification and strong performance potential.

We believe differentiated actively managed investment strategies rooted in fundamental research are best positioned to access and capitalize on this attractive, but often-inefficient, asset class. In fact, we think investors who adhere to passive, benchmark-driven EM equity allocations may be missing out on full exploitation of the available opportunity set.

Here are seven reasons why, in our view, EM equity investors should favor active management, in spite of…

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Andrew Sharp-Paul
Investment Director
Singapore

The growth of portfolio trading has been a constant theme in fixed income markets throughout the volatility of the pandemic. This continues the trend of clients increasingly relying on a broader variety of liquidity sources to achieve their objectives. Trading a portfolio of multiple bonds with a range of credit qualities and durations in a single transaction allows clients to access aggregated liquidity more efficiently. It can improve timing, execution, and cost, while minimizing a client’s exposure to uncertainty and volatility.

In this short blog, we share our views on the best uses for portfolio trading and discuss the current state of the market.

ETFs and portfolio trading

Importantly, standard “voice” trades remain the core of risk transfer in credit markets. However, the persistent development of the ETF ecosystem has added a…

There is a sense that the world is slowly “getting back to normal,” after more than a year of COVID-induced economic lockdowns and other restrictions. Unfortunately, many countries — and even some parts of the US — are still grappling with more contagious and virulent strains of the virus (e.g., the so-called “Delta variant”) and troublingly low COVID vaccination rates. We are not out of the woods yet. But broadly speaking, the global economy has been recovering with the aid of accommodative fiscal and monetary policy, supporting the strong performance of risk assets and the ongoing rotation from growth- to value-oriented exposures.

The threat of rising inflation is a bogeyman now. Amid supply/demand imbalances in labor and other factors, we believe inflationary pressures are likely to persist in the period ahead. Against this backdrop, our investment outlook remains largely pro-risk, but is tempered to some degree by what we see as…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston
Daniel Cook headshot
Daniel Cook
CFA
Investment Strategy Analyst

Every quarter, the Wisdom of Wellington team surveys around 100 of our Wellington colleagues across different investment disciplines and locations to get their views on what we see as the key macro questions of the day. The results can pinpoint where the firm’s views differ from the consensus and can also reveal important shifts in our collective thinking.

Given the recent minor growth scare in July when bond yields fell, we wanted to see what our survey respondents thought about where we are in the cycle. As Figure 1 shows, the consensus forecast from our survey is that the next 12 months will be the mid-cycle phase. Interestingly, however, the second most likely phase was considered to be…

MARKETS
Benjamin Cooper
Ben Cooper
CFA
Multi-Asset Strategist
London
Juhi Dhawan headshot
Juhi Dhawan
PhD
Macro Strategist
Boston

As credit spreads have compressed to post-global financial crisis tights, and with bond yields hovering near all-time lows, I believe the total and excess return prospects for investment-grade fixed income look rather grim. Tight valuations, coupled with some looming risks on the horizon (the COVID Delta variant, inflationary pressures, fading fiscal stimulus, and China’s slowdown), may present an opportunity to “take some chips off the table,” so to speak. I recommend reducing both credit and interest-rate risk in many investor portfolios.

The technical backdrop remains strong

Investment-grade credit has been well-supported by strong demand from non-US investors and the domestic pension community. For overseas investors, US credit is still their best option on the yield “menu” (made even more attractive on a currency-hedged basis), given lower prevailing yields across most other developed markets. Many defined benefit pension plans have been…

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Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston
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The US stock market appears dramatically different to me now than it did just 12 months ago. Equity issuance by US-listed firms has gone up since then, while cash returned to shareholders has gone down. Based on net cash flow, I believe the market is starting to look overvalued and even bears some resemblance to the tech-stock bubble of 1999 – 2000, with stocks offering little reward potential but plenty of risk. As of this writing, I would suggest that US equity investors consider overweighting defensive, cash-producing stocks.

Is it 2000 all over again?

For 10 years following the 2008 global financial crisis, the US equity market was more or less a “cash cow,” reliably returning cash to shareholders via dividends and share repurchases. Broadly speaking, the market’s annual cash yield was around 3%, with a dividend yield of 2% and net repurchases of 1%. That changed in recent months, with net cash flow turning…

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Owen Lamont
Owen Lamont
PhD
Associate Director of Quantitative Investment Group Multi-Asset Research
Boston

“We suggest that a budget constraint be replaced by an inflation constraint.”
— Three MMT economists in a 2019 letter to the Financial Times

MMT in a nutshell

Modern Monetary Theory (MMT) is often dismissed as a fringe concept regarding unlimited government spending, but it’s a bit more nuanced than that. Basically, MMT holds that a nation’s budget doesn’t (or shouldn’t) really constrain spending because the government can always print more money if needed. Thus, it’s the “real” economy — the production, purchase, and flow of goods and services — that truly matters.

Taking it a step further, the government can theoretically spend as much as it wants to until said spending begins to create excess demand, thereby generating inflation, at which point the government should…

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Nick Petrucelli
Nick Petrucelli
CFA
Portfolio Manager
Boston

In my February 2021 blog post, Anchors aweigh at the short end?, co-authored with my colleague Caroline Casavant, we shared our outlook for short-end interest rates and short-duration credit assets, along with an idea on how to diversify liquidity sources through exposure to short-hedged non-USD government bills.

By way of follow-up here, here’s an actionable implementation strategy for investors to consider: “Tier” cash-management buckets and select investment components for each tier to enhance yield on excess cash balances.

An actionable strategy

Given today’s historically low interest rates, many clients wish to boost the yield on their operating cash, but without compromising the important role of cash as a source of portfolio liquidity. We believe the answer may lie in “tiering” one’s cash investments to ensure…

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Andrew Bayerl
Andrew Bayerl
CFA, CAIA
Investment Director
Boston

As discussed in my latest white paper, An allocator’s agenda for a reflating world, I’m concerned that many asset allocators seem to remain stubbornly positioned for a world of falling bond yields, declining inflation, and low economic growth. In my view, this is largely due to what I call a persistent “status-quo bias,” rather than much in the way of active positioning for the realities of today’s evolving global landscape.

As a result, I believe many clients have portfolio positioning that is ill-equipped to successfully navigate the potentially reflationary period ahead. The remedy? While I certainly don’t recommend a wholesale shift to all “reflationary” assets, I think one important item on every allocator’s “to-do” list should be…

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Samouilhan_Nick
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore

The recent flurry of US sanctions leveled against Russia has aggravated frictions between the two nations and cast a long shadow of doubt on the Russian equity market.

Russian President Vladmir Putin more or less forced US President Biden’s hand when he deployed an EU-estimated 150,000 troops to the Ukrainian border. However, pressure had already been mounting for the US to get tougher on Russia following the country’s unprecedented SolarWinds hacking operation and its largely unsuccessful attempts to interfere in the 2020 US presidential election.

The “new normal” for US-Russia relations

Based on these troubling incidents, it seems we have entered a “new normal” in US-Russia relations and should expect risk premiums in Russia’s equity market to…

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston
Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

The forex (FX) 1 market volatility experienced amid the COVID-19 crisis in 2020 has not entirely dissipated through the first four months of 2021. An improving economic backdrop, along with recent rises in US inflation expectations and interest rates, have somewhat altered global currency dynamics. Here are the latest views from members of our global fixed income platform.

At a high level

As of this writing, we continue to see the most attractive global currency opportunities in non-dollar crosses. 2 Supply bottlenecks worldwide and pent-up consumer demand will likely support developed market (DM) trade and commodity-linked DM currencies, while continued US economic outperformance and concurrent higher US yields could pressure select high-beta currencies in the…

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Jitu Naidu
Investment Communications Manager

Over the past few years, easy monetary policy worldwide hasn’t been enough to fully revive global economic growth. It has, however, helped to catalyze a strong equity rally, concentrated in a fairly small number of stocks — many of them technology and e-commerce businesses — that have been able to consistently “outgrow” the sluggish global economy. This rally has been aided by the advent of growth-focused ETFs, index funds, and smart beta products, along with (more recently) the US day-trading phenomenon that has accelerated amid COVID-19.

But we think the world is starting to change. Driven by unprecedented levels of monetary and fiscal stimulus in response to COVID-19, the economic growth outlook is improving. Commodity and interest-rate markets are grappling with…

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Naveen Venkataramani
Naveen Venkataramani
Equity Research Analyst
Singapore
Namit Nayegandhi
Namit Nayegandhi
Equity Research Analyst
Singapore

With front-end US interest rates flirting with the zero mark recently, the question of how to manage cash investments in a world of ultralow or even negative yields has been top of mind these days. So I’d like to share my latest thoughts, from an investment treasurer’s standpoint, on how investors with cash positions might navigate this challenging landscape.

Nothing special about ultralow or negative rates

The decline in yields over the past year or so has had a meaningful impact on the search for incremental alpha, particularly in the cash and short-duration space. Many institutional clients need or want to put languishing cash balances to work in an effort to…

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Jeff Saul
Jeff Saul
Manager, Investment Treasury & Investment Implementation, EMEA
London

Since January 2021, many investors have come around to the view that the US appears poised for a strong rebound in economic growth, driven by fiscal stimulus, vaccine administration, and economic reopenings. Meanwhile, bottlenecks in global supply chains have made it more challenging to meet increased demand for goods and services, causing input costs to rise across a number of industries.

Taken together, these developments have led to mounting inflation expectations and upward movements in interest rates. Year to date through 12 April 2021, the 10-year US Treasury yield has risen 75 basis points (bps) to 1.67%. The spread between the fed funds rate and the US 10-year Treasury note, a general proxy for yield-curve steepness, is also up meaningfully.

I believe the risk of further rises in inflation expectations and interest rates is not yet fully priced into markets. There are steps fixed income investors can take now to manage this growing risk to their portfolios. One way to do so may be via allocations to higher-income, shorter-duration assets such as floating-rate loans (FRLs).

The “duration rotation” is underway

In today’s low-yield world, a steepening yield curve can have a material negative impact on…

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Dave Marshak headshot
David Marshak
Fixed Income Portfolio Manager
Boston

I’m often asked lately: Why are you so bullish on emerging markets (EM) equities these days? What makes the story so compelling, and what’s driving it? Let’s take a look, and while we’re at it, I’ll share my latest thoughts on China’s burgeoning A-share market. 

A flood of liquidity, a sprinkle of taper

I believe the broad opportunity set in EM equities is particularly attractive today, fueled in part by the unprecedented amount of liquidity in global markets. China’s was the first EM central bank to begin tightening monetary policy. In the US, real interest rates moved unexpectedly higher recently, which has led to some market tension within EMs between prospects for stronger global growth and whether or not higher real rates will persist. Brazil and Russia are also…

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston
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