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COVID-19 Equity

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The COVID-19 pandemic has represented a near-perfect storm for the world’s leading technology companies. Both earnings growth and valuation multiples have risen to extraordinary levels. Naturally, this raises questions about the sustainability of the current dynamics and the prospective risks and opportunities for investors.

The enduring case for tech

The technology sector’s strongest companies were already executing at a high level coming into 2020 — growing fast, expanding margins, and reinvesting in their value propositions. The COVID-19 pandemic has accentuated these characteristics by accelerating the need for consumers and enterprises to digitize. In addition to the COVID-19 tailwind, I think these firms deserve significant credit for their agility and decisiveness — as both attributes have allowed them to pivot quickly to capture these growth opportunities. Furthermore, I believe these companies’ unprecedented…

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Daniel Pozen
Dan Pozen
Equity Portfolio Manager
Boston

To me, one of the striking features of the current US stock-market rally is that many investor sentiment and positioning indicators have stayed depressed, even as equity prices have surged. (Some indicators have risen of late, but the ones I pay the most attention to have not.)

To a degree, the weak sentiment is understandable, given the massive blow that COVID-19 delivered to the economy and financial markets. It’s also quite plausible that the recent spike in unemployment could have adverse economic knock-on effects, potentially causing equities to reverse course. On the other hand: 1) we may have reached a nadir in growth; 2) the market itself bottomed seven weeks ago; and 3) the US policy response to the crisis has been swift and aggressive. Perhaps the market won’t…

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Nick Petrucelli
Nick Petrucelli
CFA
Portfolio Manager
Boston

Amid the impending government stimulus, the issue of stock repurchases has once again hit the headlines. Buybacks are often framed as the poster child of corporate greed or lapses in governance, designed to line executive pockets and enrich existing shareholders at the expense of broader long-term value creation. But the first critical point to remember is that buybacks should be a distribution of profits that remain after all constituents have been taken care of, and they should not be done at the expense of any stakeholder, including employees.

Let’s assume that the buybacks we have seen have been made with good intentions and examine what influenced the decision making. Stock repurchases are one of five capital allocation tools available to public companies, along with business reinvestment, acquisitions, dividends, and debt reduction. Like any other capital allocation decision, there are times when buybacks make sense, and times when they don’t. How, why, and when management teams take these actions matters greatly. Skilled capital allocation separates…

 

MARKETS

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Mark Whitaker
Equity Portfolio Manager
Boston

The S&P 500’s substantial market rally from recent lows has led many investors to question whether a new bull market has begun. In my view, bear market history should give pause to anyone who thinks we are off to the races again. In the US, prior to the recent crash, there have been nine bear markets of at least 20% since 1987. Figure 1 offers several lessons from these bear markets (each gray and white section), showing the meaningful lows and gauging the magnitude and quality of any rallies that were recorded as each bear market unfolded. For instance, in 1987 there were two major lows. Between the crash and the next low, the market rallied…

MARKETS

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David Lundgren
David Lundgren
CMT, CFA
Director of Technical Analysis
Boston

Typically, when we think of defense and risk aversion, we think of countercyclical exposures, where the focus is on certainty on earnings, stable and strong fundamentals, and/or low price volatility. This is separate from our view on factors utilized for capital appreciation, such as growth or value factors. In Figure 1, we show the down-market capture (DMC) for commonly used factors in the US and Europe over the long term and during the market sell-off between February 18 and March 23. The numbers indicate how much of the down-market return the factor “captures.” For example, if the market was down 10% and the DMC was 60%, the factor return was…

THEMES

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Gregg Thomas
CFA
Director of Investment Strategy
Boston

After its recent bounce, the S&P 500 is now wrestling with our near-term upside target in the 2,700 range. In my view, we are starting to see evidence that the market is normalizing, setting the stage for a bottoming process to begin. And even if the market sees new lows in that process, I believe it will hold above 2,000 – 2,100. From this point forward, however, I think whether or not we retest the bottom before moving higher is irrelevant. I believe it is time to ignore the market and instead focus on the factors, regions, industries, and stocks that will lead in the next bull cycle.

Will the market see new lows?

The dominant consensus view seems to be that the market will see lower lows. Investors then appear to be split between the bulls and the bears, but both camps seem to confidently expect this near-term outcome. My best-case scenario is more bullish…

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David Lundgren
David Lundgren
CMT, CFA
Director of Technical Analysis
Boston

Recent price-to-book (P/B) ratios relative to history underscore how wide the performance dispersion within emerging markets (EM) has become amid the COVID-19 crisis (Figure 1). Looking ahead, I expect this trend to persist and perhaps accelerate.

Figure 1

EM equity valuations in historical context

As a result, I believe we have entered a period in which country selection — or more precisely…

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Vera Trojan
CFA
Equity Portfolio Manager
Boston

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…

SUSTAINABILITY

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

This crisis represents a seminal moment for responsible investing. To this juncture, I believe many portfolio managers have understandably struggled to incorporate environmental, social, and governance (ESG) into their investing frameworks. ESG can feel steps removed from buy/sell decisions and seem arbitrary, as though conclusions are reached by applying personal values.

I see this changing right now. Starting with Wellington’s recent virtual Consumer Conference, and continuing over the past couple of weeks, we have had hundreds of touch points with company management teams. Those conversations have broached topics affecting a wide range of stakeholders:

  • Is management working from home?
  • Who is coming into your offices/stores/warehouses/factories?
  • How are you dealing with employees?
  • How are you accommodating customers?
  • Are you building supply-chain resilience?
  • What’s happening in your local communities?

These discussions have felt natural, because they are very relevant to long-term shareholder value. Stakeholders will remember companies’ actions during this crisis for a long time. The ability to hire, rehire, and retain talent will be shaped by reputations developed now…

SUSTAINABILITY

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Mark Mandel
Mark Mandel
CFA
Equity Portfolio Manager
Boston

Wellington’s investor community is collaborative and supportive, characteristics that shine in times of crisis. We come together to support one another, share information and insights, and ensure that we continue to make the best possible decisions for our clients. Michael Carmen, one of Wellington’s senior investors, sent a note out to his colleagues recently. His comments follow.

I thought I would put a few thoughts out there, as we once again navigate a difficult market environment.

  1. During periods of extreme volatility, mistakes are inevitable. Right now, it may seem like every transaction we made before the market declined looks bad and every upgrade we’ve made since hasn’t worked out. Don’t look in the rearview mirror; the information is changing fast. Just focus on trying to make the right decision for your clients every single day.
  2. Maybe another way to say this is, don’t let a bear market (or a recession) go to waste. Make sure your portfolio is positioned to hum on the other side of this. An old mentor of mine once said, “You might need to underperform in the near term in order to…
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