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

I think one of the biggest catalysts behind the general rise of the US dollar (USD) over the last 10 years or so has been the marked improvement we have seen in the US energy trade balance.

The so-called “shale revolution” has benefited the US economy in myriad ways, from enhanced productivity to higher levels of employment and increased tax revenues. However, the degree to which it has helped to moderate the underlying deterioration in the US current-account deficit has gone largely underappreciated. That, in turn, has been a tailwind for the USD for most of the past decade. I’m just not sure how much longer…

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MARKETS
Brian Garvey
Brian Garvey
Multi-Asset Portfolio Manager

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…

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

The November 2020 election of US President Biden and a Democrat-led Congress rekindled many health care investors’ fears of sweeping drug-price reform that could be an albatross around the neck of the pharmaceutical industry. So far in 2021, there has been some legislative movement by Congressional Democrats to address drug pricing, but little more than lip service in terms of support from the Biden administration. For now anyway, it seems that other pressing matters — battling the COVID-19 pandemic, supporting the US economy, and improving the nation’s infrastructure — have kept the administration from pushing for drug-cost legislation.

Of course, that could change going forward. Or perhaps not. In the meantime, the market does not like the ongoing uncertainty around the fate of US drug prices, which has recently pressured many pharmaceutical stocks and may continue to do so (not unlike the struggles of HMO and health care services stocks when Obamacare was in progress). Here’s my latest take on the risk facing the industry in the form of three possible scenarios to consider, including the…

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Wen Shi
PhD, CFA
Global Industry Analyst
Boston, MA

For fixed income investors, varying the amount of credit risk in your portfolio can exert a major influence on the portfolio’s realized alpha. Indeed, historical data shows that this single factor can have a larger impact than decisions around what bond sectors or individual issuers to invest in. Accordingly, it’s worth spending some time thinking about precisely how much credit risk to take and when. My latest research in this area focuses on the role that valuation can play in adjusting credit risk over an economic cycle.

Methodology at a glance

I looked at the strategic timing of buying and selling credit exposure (in the form of corporate bonds, using cash or US Treasuries as a funding source) with low turnover, and using market valuation as the sole buy/sell signal. There are, of course, other predictive drivers of credit returns, such as…

MACRO
MARKETS
Robert Burn
Rob Burn
CFA
Fixed Income Portfolio Manager
Boston

With so much money flowing into new markets like renewables and cleantech, we will see some companies succeed and perhaps become the next Tesla. We will also see some companies fail spectacularly. In other words, there will be a great deal of dispersion. We have seen hundreds of special purpose acquisition companies (SPACs) raised in the last few years, with many focusing on cleantech and other forms of energy and transportation disruption. Most of them assume a J curve in their revenues and profits, and I think it’s reasonable to expect that they won’t all achieve their projections. However, given limited sell-side coverage, identifying those that will make it and those that will not could prove to be lucrative.

The importance of time horizon for traditional and renewable energy sectors

In thinking about energy investment opportunities, I believe having a differentiated time horizon is essential — that is, focusing on the long term when others are focused on the short term, and vice versa. When things go bad in the energy sector, it’s difficult for investors to imagine how things can go back to normal. During the COVID crisis, for example, many were ready to write off the oil market, believing that prices were permanently impaired and treating the equities and debt of the companies accordingly. But as we saw…

“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…

MACRO
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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…

MARKETS
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…

MACRO
MARKETS
Nick Samouilhan
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…

MACRO
MARKETS
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…

MARKETS
Jitu Naidu
Investment Communications Manager
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I call it: “Cheap US equities: the low-rate adjustment.”

The strong post-March 2020 rebound in US equity prices rekindled rumblings about stretched or even “bubble-like” valuations. Myriad metrics can be rolled out to suggest “excessive” price levels, but how often do these arguments account for the broader investing landscape — inclusive of interest-rate expectations and the relative risk/return offered by US Treasuries? I believe they should.

Acceptance of paradigm shifts

One way to think about the relative value and appeal of equities is to look through a fixed income lens with a focus on risk-free rates. For the past decade, US stocks have remained cheap relative to Treasuries because…

MARKETS

ARCHIVED

Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston

I call it: “Cheap US equities: the low-rate adjustment.”

The strong post-March 2020 rebound in US equity prices rekindled rumblings about stretched or even “bubble-like” valuations. Myriad metrics can be rolled out to suggest “excessive” price levels, but how often do these arguments account for the broader investing landscape — inclusive of interest-rate expectations and the relative risk/return offered by US Treasuries? I believe they should.

Acceptance of paradigm shifts

One way to think about the relative value and appeal of equities is to look through a fixed income lens with a focus on risk-free rates. For the past decade, US stocks have remained cheap relative to Treasuries because…

MARKETS

ARCHIVED

Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston

Commentators have written extensively about the recent surges in various pockets of the equity market — most recently, in heavily shorted stocks. Given the complexity and opacity of this market segment, the breathtaking moves left many investors understandably unsettled. While there is still more to learn about the volatility unleashed by the so-called “short squeeze,” for now, I’d like to address some client questions about the episode and attempt to put it in a larger context.

What happened?

A group of retail investors identified a handful of beaten-down stocks deemed to be “COVID losers” and went long these companies, both outright and on a leveraged basis via options. Positive investor sentiment in combination with thin market liquidity drove the stock prices higher. Call options buying accelerated the upward climb, as banks (which sold the options) had to…

MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

In my August 2020 blog post, I highlighted a potentially compelling return opportunity in the often-scorned universe of “fallen angels” — formerly investment-grade-rated corporate bonds whose ratings have been downgraded to high-yield (i.e., below-investment-grade) status by major credit rating agencies. I noted that, within two years of being thus downgraded, fallen angels as a group have handily outperformed the broader US high-yield index (and all three of its quality subgroups) over the long term.

Fast forward to early 2021: What I call the “fallen-angel effect” appears to have lost none of its luster. And notably, my latest research revealed that it’s not limited to just…

MARKETS

ARCHIVED

Robert Burn
Rob Burn
CFA
Fixed Income Portfolio Manager
Boston

In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

FIGURE 1

There is pent-up demand to “get back to normal”

#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

MACRO
MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

Figure 1

US Dallas Fed Mobility Engagement Index ("Social Distancing" Index)

#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

MACRO
MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

I call it: “Cheap US equities: the low-rate adjustment.”

The strong post-March 2020 rebound in US equity prices rekindled rumblings about stretched or even “bubble-like” valuations. Myriad metrics can be rolled out to suggest “excessive” price levels, but how often do these arguments account for the broader investing landscape — inclusive of interest-rate expectations and the relative risk/return offered by US Treasuries? I believe they should.

Acceptance of paradigm shifts

One way to think about the relative value and appeal of equities is to look through a fixed income lens with a focus on risk-free rates. For the past decade, US stocks have remained cheap relative to Treasuries because…

MARKETS

ARCHIVED

Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston

Broadly speaking, as of this writing, we believe municipal bond (muni) valuations may offer an attractive entry point for discerning investors. As of December 2020, municipal credit spreads had yet to make up for ground lost to the COVID-19 sell-off earlier in the year (Figure 1). Lower expected 2021 tax-exempt supply and strong retail demand suggest there is room for further spread tightening.

Having said that, challenges remain. Fundamentals in some areas of the muni market continue to be tested by the COVID-induced economic slowdown. Accordingly, deep credit research remains critical in this space. Let’s take a closer look on a sector-by-sector basis.

Figure 1

BBB muni spreads have tightened but remain elevated

1. Not-for-profit health care: Jenn Soule (Sector Analyst)

2020: Lessons learned

  • Market tends to overcompensate after…
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Timothy Haney
Tim Haney
CFA
Fixed Income Portfolio Manager
Boston
Brad Libby
Brad Libby
Fixed Income Credit Analyst
Boston

In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

Figure 1

There is pent-up demand to “get back to normal”

#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

MACRO
MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

The massive amounts of fiscal and monetary stimulus injected into the global system last year have sparked debate around the prospect of potentially higher interest rates going forward. And the financials sector often tops the list of likely equity-market beneficiaries in a rising-rate environment.

Our take? Without trying to make a “call” on the interest-rate outlook, we see a compelling relative return opportunity in some interest-rate-sensitive financials — select multinational banks, insurers, and diversified financial service names — with strong fundamentals and underlying growth metrics.

It’s about the fundamentals

Understandably, the financial sector’s chronic underperformance and multiple “head-fakes” toward a possible recovery over the past five to 10 years make it difficult for many investors to…

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THEMES

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Daniel Pozen
Dan Pozen
Equity Portfolio Manager
Boston
Nick Petrucelli
Nick Petrucelli
CFA
Portfolio Manager
Boston
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