MAIN MENU

#WellSaid

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

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…

MARKETS
THEMES
Wen Shi
PhD, CFA
Global Industry Analyst
Boston, MA

In my recent blog post, I outlined why I believe large-scale public payment processors will maintain compelling long-term growth rates even as fintech disruptors take market share. I think that share will largely come at the expense of banks instead. Banks are still the largest players in the payments market, and their 50% – 60% market share is the easiest target for these fintech companies. In addition, in my view, many banks have weak product offerings and a lack of strategic focus in this space that results in a large amount of payments volume sitting in the weakest hands in the industry. This transition may also benefit scale processors if banks look to partner with them to maintain share. We are seeing this begin to play out in Europe, but I expect the trend to continue, if not accelerate, across most geographies.

Despite this long-term growth potential, some investors have wondered why these scale processors’ performance has recently lagged that of cyclical recovery stocks. The main reason is that these stocks have never acted as a cyclical element of portfolio construction in the past and therefore aren’t viewed that way by the market.

These scale processors are now being compared to peers that have had drastically different experiences in the pandemic due to distinct business models. The stocks that have underperformed have generally been impacted by…

THEMES
Matt Ross
CFA
Global Industry Analyst
Boston

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.

In January’s survey, we asked which risks the market was most complacent about. This quarter, we followed up by asking respondents to rank which upside risks the market should be focusing on (Figure 1). The number two upside risk was the potential release of pent-up savings amassed during the pandemic, which has already been the subject of widespread comment. But the top-ranked upside risk — of a structural boom in capital expenditure (capex) — has attracted far less comment. Many of our macro thinkers believe that the market is underestimating the potential for a lasting increase in capex fueled by investment in green initiatives and infrastructure…

MACRO
THEMES
Benjamin Cooper
Ben Cooper
CFA
Multi-Asset Strategist
London

The US Federal Reserve’s (Fed’s) message on inflation is clear: Higher domestic inflation is likely in the period ahead, but it should be “temporary” in nature. This begs several questions, among them: What exactly does “temporary” mean? Which price increases, if any, could be longer lasting? And if higher inflation proves to be “stickier” than anticipated, how should investors position their portfolios?

The Fed’s latest forecast is for the Consumer Price Index (CPI) to rise to 2.6% this year (which it already hit in March), before settling back down to just over 2% in 2022 and 2023. Likewise, market expectations (as observed in recent “breakeven” inflation rates) are for US inflation to pick up in the near term and then come down longer term. Yet I am hearing from some of my analyst colleagues that many areas of the economy are facing stubborn supply shortages and upward price pressures, including freight, semiconductors, housing, raw materials, and labor.

Thus, in my view, the risk is that higher inflation may have a longer-than-expected “tail” before…

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

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…

MARKETS
THEMES
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…

MARKETS
THEMES
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…

MARKETS
THEMES
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…

MARKETS
THEMES
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

In my last blog post, I shared some high-level thoughts on the financial technology (“fintech”) industry and what its increasing relevance means for traditional financial services. Beyond the fast-growing digital payments space, I identified two broad categories of fintech “disruptors” that will present opportunities going forward:

  1. Infrastructure companies that use modern technology to solve business and technology orchestrations that have historically been executed by banks; and
  2. Product companies that leverage these new infrastructure providers to rethink traditional financial services products and develop more effective solutions.

How legacy financial services players (particularly banks) tap into the new infrastructure providers and respond to…

THEMES
Matt Ross
CFA
Global Industry Analyst
Boston

More than two months into the Biden administration, some important contours of the post-Trump approach to US-China relations have begun to crystallize.

The president’s foreign policy team is coming together (including key positions for US-China policy), US military strategy is becoming clearer, and supply-chain management is a growing area of concern. Meanwhile, government reports released earlier this month — on artificial intelligence, trade policy, and national security priorities — have helped to better define the administration’s thinking on…

MACRO
THEMES
Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston
Load More

Archive

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…

MARKETS
THEMES

ARCHIVED

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

MARKETS
THEMES

ARCHIVED

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

COVID-19 has disrupted a lot of things we took for granted, including how we try to manage our health. Odds are, unless someone needed urgent care in 2020, they avoided entering health care facilities and postponed many medical procedures to a later date. This trend has formed an interesting investment proposition, as previously stable surgical demand now appears positioned for a cyclical recovery.

In the recent market recovery, where there has been rotation into so-called “COVID losers” on hopes of vaccine breakthroughs, I believe investors may still be overlooking an opportunity in deferred surgery stocks within the health care sector — specifically, makers of medical devices, supplies, and equipment. Many of these stocks are likely to benefit from positive vaccine developments and gradually reopening economies in 2021, as consumers begin to regain confidence in accessing the health care system to meet their general medical needs.

Adding to my conviction, most of this industry’s products and services are not really discretionary in nature, as no one truly “elects” to undergo surgery. Many of the elective procedures that were put off in 2020 cannot be…

THEMES

ARCHIVED

Fayyaz Mujtaba
Fayyaz Mujtaba
Global Industry Analyst
Boston

Japan has experienced deflation for much of the past 30 years (Figure 1). That’s the general consensus, so why my titular question? Because what Japan has not had over the past three decades is the sort of broad wage-service deflation that is most feared by economists. Instead, I would characterise Japan’s deflation as having been mostly idiosyncratic in nature.

Figure 1

Is Japan's deflation cycle at the end?

Deflation was mostly idiosyncratic

Japan’s protracted battle with deflation was largely attributable to specific dynamics, including the country’s botched policy response to its 1980s asset-price bubble, whose collapse in 1991 ushered in Japan’s so-called “lost decade” — a period of economic stagnation that lasted until 2001. In addition, I believe the massive…

MACRO
THEMES

ARCHIVED

Paul Cavey
Paul Cavey
Macro Strategist
Hong Kong

Factor investing – tilting a portfolio toward securities that have certain attributes (e.g., attractive value, quality, momentum, etc.) – has become widely accepted and practiced in the world of equities. Within fixed income, it is in a more nascent stage.

However, we believe that applying a factor-based investing framework can lead to valuable insights into what is driving performance in different sectors of the bond market. Even more important, it may allow investors to better position their portfolios to take advantage of…

MARKETS
THEMES

ARCHIVED

Samuel Steere
CFA
Investment Director
Boston
Brendan Fludder
CFA
Research Manager
Boston

When I think of “old school” emerging markets (EMs), I think of Mexico. What started out as an exercise to determine if Mexico could be a “Biden trade” soon turned into my belief that some Mexican equities could perform well going forward regardless of the election outcome.

Mexico is not a “COVID reopening” trade, in my view, because President Andrés Manuel López Obrador (AMLO) neither locked the country down aggressively amid the pandemic, nor took any bold steps to stimulate the market. In fact, by not pursuing deficit spending in response to COVID, Mexico’s balance sheet may hold up better than most EMs’ heading into 2021.

More to the point for investors, some Mexican companies appear to be pivoting toward…

MARKETS
THEMES

ARCHIVED

Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

1. When might a COVID vaccine become available?

In light of the recent positive news on the COVID vaccine front, it is possible that a vaccine could be authorized for use in the US as early as late 2020. Additional vaccines could be authorized or approved during the first quarter of 2021.

The logistics of vaccine distribution will be daunting. Under Operation Warp Speed, vaccine developers have already been manufacturing vaccine inventory at some risk, in anticipation of favorable efficacy and safety data. Nevertheless, the immediate demand will likely far exceed the initial supply.

Priority will be given to high-risk health care workers and first responders; then to people of all ages with comorbid conditions that put them at elevated risk of poor outcomes, along with older adults living in crowded circumstances; then to all adults over age 65; and so on. It’s likely to be well into 2021 before everyone in the US can be offered a vaccine.

2. What’s the prognosis for those infected?

It’s a moving target and depends on several factors, including the underlying health and age of the patient, the ever-improving medical knowledge of optimal case management, and the availability of medications active against the virus.

The observed death rate from COVID-19 has dropped considerably since the pandemic first reached the US and now stands at…

CORONAVIRUS
THEMES

ARCHIVED

Bob Deresiewicz
Bob Deresiewicz
MD
Global Industry Analyst
Boston
Wen Shi
PhD, CFA
Global Industry Analyst
Boston, MA

The US Federal Reserve’s (Fed’s) recent adjustments to its monetary policy framework are impactful for short-term investor returns, affirming our expectation that short-end interest rates will likely remain at or near zero for at least the foreseeable future. This brings short investors back to the dilemma many knew all too well post-2008: With most deposits and money market funds earning next to nothing in yield, how should I invest my liquid and reserve assets?

For clients’ second-tier cash bucket (reserves or excess liquidity), here are three suggestions to modestly increase income without adding significant risk.

1. Increase duration flexibility for excess reserves

Money market funds are governed by strict rules that limit the investable universe. There has also been a surge of inflows into money markets (Figure 1), further suppressing potential income from assets meeting the money market criteria. Thus, we believe expanding one’s opportunity set beyond the traditional money market rules — while still remaining on the short end — may…

MARKETS
THEMES

ARCHIVED

Caroline Casavant
Caroline Casavant
Investment Analyst
Boston
Andrew Bayerl
Andrew Bayerl
CFA, CAIA
Investment Director
Boston

Citing consumer welfare and competition concerns, a rising chorus of voices is calling for more government regulation of the most dominant players in the US technology sector. As recently as late 2019, the co-founder of one household tech name even opined that government should step in and regulate the tech giants. The sector’s perceived impact on the upcoming national elections has helped fuel what some observers describe as growing “anti-big-tech” fervor.

So, what might come of it? It depends who you ask, but in my view, probably not a lot. I think federal privacy legislation will be on the roadmap if an agreement can be reached, but changes to antitrust law and/or content regulation seem…

THEMES

ARCHIVED

Brian Barbetta
Brian Barbetta
Global Industry Analyst
Boston

Earlier this summer, I virtually participated in an institutional conference with about 100 other asset managers and prominent asset owners from the US, Canada, Europe, Australia, and New Zealand. It was well worth my time. Here are my main takeaways, along with some personal observations on the post-COVID-19 industry landscape.

1. Economic assumptions and forecasts were more dire than I’ve seen internally. While Chinese gross domestic product (GDP) is expected to reach pre-COVID levels this year, the US may not get there until mid-2021 and likely only on the strength of “50% of the economy in steep recovery,” according to one conference participant. The other half of the US economy may..

CORONAVIRUS
THEMES

ARCHIVED

Mark Mandel
Mark Mandel
CFA
Equity Portfolio Manager
Boston
Load More
Share on linkedin
Share on email

Categories

Trending posts

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.

Wellington Management logo

Contact Us

*Mandatory Field

Contact Us

*Mandatory Field