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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 we begin 2022, the weakness in the consumer technology sector continues. Two-thirds of internet stocks currently trade 30% lower than their 52-week highs, with many down more than 50%.1 Amid this sell-off, our conviction in the long-term outlook for tech in general and consumer tech in particular remains strong. The key question is whether this market presents an opportunity to buy the dip or if investors should remain patient as the pullback could persist.

In our 2022 Outlook, we noted that valuations, tough year-over-year comparisons, and decelerating growth are among the issues that make it difficult to have much conviction on this question. Adding the Omicron variant to the mix further complicates the outlook for the consumer technology sector.

However, we think technology’s long-term secular tailwinds signal that the recent sell-off could be a significant opportunity to…

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Brian Barbetta
Brian Barbetta
Global Industry Analyst
Boston

Climate change will continue to be an increasingly dominant theme as global climate-related regulation accelerates, disclosures such as the CDP (formerly the Carbon Disclosure Project) and the Task Force on Climate-related Financial Disclosures become more standardized (and in some regions, mandatory), and investor focus on the climate intensifies. In this short piece, we highlight how this impacts private companies and share our top questions for companies to be prepared to address as this issue grows.

Rising climate risks and investor expectations

In our view, companies across all sectors and stages should incorporate thoughtful approaches to climate change into their business models. This includes building resilience for the accelerating transition to a low-carbon economy and the worsening physical events exacerbated by climate change. Many companies overlook and/or underreport climate-related risks and opportunities that can be…

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Hillary Flynn
Hillary Flynn
Director of ESG, Private Investments
Julie Delongchamp
Julie Delongchamp
CFA
Climate Transition Risk Analyst
London

As discussed in my recently published 2022 Fixed Income Outlook, co-authored by my colleague Jitu Naidu, we believe inflation and interest-rate risks look poised to supplant the global COVID-19 pandemic as the new “bogeymen” facing investors in 2022. The dual specter of persistently higher inflation and steadily rising rates has many allocators particularly worried about potential implications for their fixed income exposures. Accordingly, many are now seeking defensive portfolio strategies — so-called “hedges” — for the new year.

Possible inflation scenarios

Market pricing for longer-term US inflation was recently in the mid-2% range, based on the latest “breakeven” inflation rates. There are still ongoing debates as to likely inflation outcomes going forward, but most of the informed forecasts appear to…

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Amar Reganti
Amar Reganti
Investment Director
Boston
Jonathan Tan
Jonathan Tan
CFA
Investment Specialist
Singapore

Over the past decade or so, there have been countless studies and articles on the inability of active portfolio management to reliably add value versus market benchmarks, even before accounting for fees. However, most of the research tends to focus on US markets, particularly US large-cap equities, and glosses over (or ignores altogether) the reality that there are other market categories where active managers have, in fact, had a great deal of success historically (and may continue to do so). The inefficient Japanese equity market is a prime example.

A good fishing pond

The proof is in the pudding, as shown in Figure 1: During 70% of rolling three-year time periods over the past 20 years (ended 31 December 2020), at least 60% of active Japan equity managers — in some years, substantially more than that — have outperformed their respective benchmarks. By contrast, and as expected, most US large-cap equity managers have struggled to consistently top their benchmarks, with 60% or more…

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Ueki Hideo
Hideo Ueki
CFA, CMA
Director of Investment Products and Strategies
Megan Kelly
Megan Kelly
CFA
Research Manager
Boston

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Investing in the metaverse

The growing excitement for the metaverse is powered by its incredible potential applications and the tremendous value they could create. But importantly, the technology enabling this seemingly magical innovation is still in development. What some overlook is that the biggest bottleneck today is not software or imagination — but rather the necessary upgrades to the metaverse’s foundational hardware infrastructure. This could create massive investment opportunities…

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Yash Patodia
Yash Patodia
Global Industry Analyst

The US Federal Reserve’s (Fed’s) message on inflation has changed. Fed Chair Jerome Powell recently characterized supply shocks, bottlenecks, and disruptions as “frustrating” and as “holding up inflation longer than we had thought.” The Fed’s mea culpa is small consolation for investors whose portfolios have not been positioned optimally for a longer-than-expected period of higher inflation.

The question now is: Has inflation already peaked? The short answer is no, in my opinion.

The systemic nature of supply shocks

Inflation is being pushed higher by three catalysts — labor, raw materials, and transportation — that are interrelated in ways that…

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

In my October blog post, A firsthand look at Brazil’s straitjacket, I painted a rather grim portrait of Brazil’s macroeconomic landscape following my latest visit to South America’s most populous nation. The “straitjacket” metaphor arose from my sense that Brazil may be increasingly hemmed in by its elevated rates of inflation — the heaviest “tax” on the poor — along with political uncertainty leading up to its October 2022 presidential election and a host of other country-level challenges.

I still believe that. But despite my downbeat macro outlook, as an emerging markets equity investor, I think there is a decidedly more positive side to Brazil’s story. After meeting with 22 of the country’s corporate CEOs, some of whom chatted with me for more than an hour, I came away more convinced than ever that Brazil offers plenty of stock- and industry-specific investment opportunities. You just have to…

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

In the wake of the latest growth stock sell-off, I’ve been reviewing my equity opportunity sets across the market sectors and subsectors that I cover, including digital advertising, e-commerce, and video games. For now, I’d like to focus specifically on that latter segment of the market. The upshot: In general, I remain positive on the future of gaming and find a number of the stocks to be potentially attractive investment plays as of this writing.

Many of these stocks outperformed amid the height of COVID-19 and the widespread physical lockdowns triggered by it — to no one’s huge surprise really, because many people were more or less “stuck” at home for months on end, with ample time (and desire) to indulge in leisure activities like gaming that they might not be able to partake of under more “normal” societal conditions. But, and again not that surprisingly, many of the same stocks have underperformed this year as much of the world (thankfully) has begun to shed or loosen the pandemic-induced shelter-in-place orders, business closures, travel restrictions, and so on.

Why I’m bullish on video game stocks

Interestingly, however, my research and anecdotal evidence suggest that the amount of time global consumers have actually spent on gaming entertainment…

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Brian Barbetta
Brian Barbetta
Global Industry Analyst
Boston

I spent 10 days in Brazil in August 2021, visiting technology, retail, real estate, and health care companies in search of stocks to add to my potential “buy” list. I met with 22 corporate CEOs, 21 of whom told me I was the first foreign investor they’d seen in person since pre-COVID. Many of them chatted with me for over an hour — a vivid illustration of how there is just no substitute for being on the ground in emerging markets (EMs), especially at a time like this.

I departed with some valuable insights into a number of companies that led me to better appreciate the robustness of their business models. Indeed, there are plenty of stock- and industry-specific investment opportunities in Brazil, which I’ll explore in a future blog post. But at the broad country level, I left with a decidedly more negative take. The analogy that came to mind was that of Brazil being in a “straitjacket,” with all the unpleasant…

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

Two recent developments — the accelerating focus on ESG and more aggressive policy interventions — could well change the way we invest in years to come. My perspective is that of a fixed income manager, but I believe these developments will impact all asset classes.

ESG focus

A growing societal and market focus on environmental, social, and governance (ESG) issues has kickstarted a reallocation of capital, which creates new opportunities and risks for fixed income and other investors.

  • Higher inflation

In my view, the increased focus on ESG may contribute to higher inflation, at least in the short-to-medium term. Implementing environmental considerations, for instance, while desirable from a societal perspective, may involve short-term cost adjustments. This seems particularly relevant in the context of…

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Marc Piccuirro
Marc Piccuirro
CFA
Fixed Income Portfolio Manager
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Japanese stocks have been decidedly out of favor with most investors for several years now, underperforming most recently in response to the 2020 COVID-19 crisis and Japan’s delayed economic recovery from it this year. (For more on that and related equity opportunities in Japan these days, please see Revisiting Japan from a contrarian perspective, co-authored by my colleagues, Jun Oh and Takuma Kamimura.)

Meanwhile, on a more upbeat note, the trend toward Japanese corporate governance reform is steadily proceeding apace. With Japan’s revised Corporate Governance Code calling for further improvements to the functioning of corporate boards of directors, as well as strategies for addressing global climate change, Japanese equity returns to shareholders have in many cases rebounded lately amid stronger business performances. This is an encouraging development that we broadly expect to…

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Katsuhiro Iwai
Katsuhiro Iwai
CFA, CMA
Equity Portfolio Manager
Tokyo
Soda Yuichiro
Yuichiro Soda
CFA, CMA
Equity Research Analyst
Tokyo

The short answer: yes, in some ways. In a global phenomenon that seems to have gone largely unnoticed until recently, several of my colleagues and I share the view that many developed market (DM) countries are beginning to resemble their emerging market (EM) counterparts in certain respects. We call it the gradual “EM-ification” of DMs.

Does this mean long-standing DM and EM classifications may eventually no longer be relevant? Will investors have to start analyzing DMs through an EM lens? Time will tell, but in the interim, we believe this macro trend bears watching. Let’s take a closer look.

More fragile DM fundamentals

Broadly speaking, it’s fair to say that economic and other fundamentals in DMs have become increasingly fragile over the past decade-plus. During that period, severe stress episodes…

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

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

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

The recently announced intended merger of two key financial technology (fintech) players will be the second-largest deal ever in the global payments sector. Here’s my latest perspective on the broader implications of this major acquisition and the related investment opportunity in the fast-growing “buy now, pay later (BNPL)” space, which I believe has now reached an inflection point in its young storyline.

A changing industry landscape

Given the size of the total addressable market (TAM) for global payments, I’d say fintech companies have been little more than a thorn in the sides of the old guard thus far, but I think that’s poised to change. Indeed, I believe the recent blockbuster transaction noted above may have…

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Matt Lipton
CFA
Portfolio Manager
Radnor, PA

US utilities stocks have trailed the broader equity market by a wide margin so far in 2021, having just posted their poorest first-half relative performance since 1997. In fact, the underperformance has become chronic: The sector has now lagged the market by roughly 40% over the past three years – its worst multiyear stretch going back to the tech bubble of the late 1990s.

Neither I nor any other member of the utilities team here has seen anything like this during our careers. So what gives? Utilities were neither COVID “winners” nor “losers” in 2020. And then the US stock market’s persistent “seesawing” between the value and growth styles has left utilities out of this year’s market gains. Increased inflation and fears of higher interest rates have also hurt the group to some degree in recent months.

But there is a silver lining. In the wake of their underperformance, US utilities have been trading at a big discount to…

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Juanjuan Niska
Juanjuan Niska
CFA
Global Industry Analyst
Boston, MA

Broadly speaking, at least in the US and other developed markets, the COVID-19 picture has improved tremendously over the past year or so. In early to mid-2020, the global pandemic was at its fiercest, ravaging nearly every corner of the world in swift, frightening fashion. Infection rates and death tolls were rising rapidly, many economies were locked down and at a virtual standstill, and progress toward safe, effective vaccines was slow and halting at best. There was still much we still didn’t know about our deadly foe.

Fast forward to July 2021: Multiple vaccines have been approved for use and successfully administered to millions of people worldwide this year, bringing the global case-count, hospitalization, and fatality numbers down dramatically. Many economies have fully or mostly reopened and are growing at a strong clip as they rebound from the COVID shock. In short, despite some ongoing trouble spots, the developed world is on a path to recovery from the unprecedented health and economic crisis.

But not all of the news is good. The pandemic continues to wreak havoc in many emerging markets. And even in developed markets, it has experienced somewhat of a resurgence of late, as the so-called “Delta variant” — a dangerous mutation of the virus that causes COVID-19 — has spread across the world, having been found in more than 80 countries since…

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Wen Shi
PhD, CFA
Global Industry Analyst
Boston, MA

Many investors are increasingly seeking to protect their portfolios from the looming threat of higher inflation. Against this uncertain backdrop, I believe collateralized loan obligations (CLOs) can provide one source of refuge given their floating-rate coupons (yields), which would rise as short-term interest rates moved higher. Attractive current income relative to other credit assets and broadly positive CLO fundamentals further bolster my conviction in this often-overlooked asset class.

Where I stand on the inflation debate

Core US inflation spiked sharply in April and May 2021. For the three-month period ended in May, the Consumer Price Index (CPI) rose by 8.3% annualized, the biggest gain since the early 1980s. This has naturally exacerbated recent inflation concerns, raising questions around whether higher inflation will be transitory or more sustained. US interest rates have risen amid expectations for higher inflation, resulting in negative total returns year-to-date (through 31 May) for many fixed income sectors, especially longer-dated fixed-rate assets.

My take: While some of today’s inflationary pressures may indeed be short-lived, particularly within…

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Alyssa Irving
Alyssa Irving
Fixed Income Portfolio Manager
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
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