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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
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

I was recently asked, “How can you be confident that value investing will work again, when the historical results look so skewed to growth?” It’s a fair question. Looking at the Russell 1000 Growth and Value indices, growth is ahead on a one-, three- five-, 10-, and 30-year basis, and indeed since 1978, when data is first available. Among the most striking results are the one-year returns (37.5% for growth and -5.0% for value) and the 10-year annualized returns (17.3% for growth and 9.9% for value).1

However, these numbers mask how quickly the picture has shifted. As recently as February, value was beating growth since inception. And before the global financial crisis, value was ahead by more than 2% annually over almost three decades since 1978. Perhaps more importantly, there has been a strong cyclicality to the performance of growth and value that makes some “extreme” periods seem a bit more ordinary.

Haven’t we been here before?

In 1999 and 2000, growth was beating value since inception — and on a trailing one-, three-, five-, 10- and 20-year basis. Then, too, investors were asking, “Is value dead?” But value was…

MARKETS
Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston

The short answer is that they up and left, at least judging by the percentage of value managers (80%) that were recently underweight value stocks (Figure 1). Some observers may offer reasonable arguments for why such positioning seems justified in the current environment, but the fact is that value equity managers have traditionally tended to lean into relative valuation extremes like today’s. Instead, most are leaning away.

Figure 1

Opportunity in value stocks? 80% of value managers were recently underweight the group

Déjà vu all over again?

This calls to mind a 20-year-old quote from retired Wellington Portfolio Manager Ed Owens that is relevant again today. In January 2000, Ed opined that “value is particularly attractive now, because it has…

MARKETS
Andrew Corry
Andrew Corry
CFA
Equity Portfolio Manager
Boston

While the UK equity market appears attractively valued and has the potential for a rebound, I remain neutral on UK equities for now as I believe the uncertain political outlook provides a poor basis for active risk taking. In essence, the outcome of the Brexit negotiations is hard to judge, and a non-cooperative outcome could prove highly disruptive for the UK economy and equities. In my view, this risk is not priced into the market at present.

The UK has had a poor COVID crisis

The UK’s health and economic outcomes have been in line with the worst in Europe, and managing this twin crisis will remain problematic in the near term. At the same time, the UK faces longer-term challenges, such as changes in the migration framework, a sharp rise in minimum wages and the perennial issues of low productivity growth and a large current-account deficit. Together, these near-term and structural challenges create a…

CORONAVIRUS
MARKETS
Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

While economic activity is likely to recover slowly in the euro area, I believe the risk of a much worse outcome has abated. Improved macroeconomic policy should lead to a stronger recovery, driving further reductions in the valuation gap between US and euro-area stocks.

The COVID-19 crisis has caused a deep recession in the eurozone, and I don’t expect activity to return to end-2019 levels until mid-2022. A recession of this magnitude leaves many kinds of economic scars. Jobs and businesses are destroyed, and the necessary reallocation of labour and capital is expensive and takes time. Balance sheets are damaged as a result of falling incomes, and the continued uncertainty constrains investment and consumption.

On the plus side, I believe Europe’s management of the health crisis and the economic policy response have been strong enough to substantially reduce downside risks to…

CORONAVIRUS
MARKETS
Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

In my last blog post, dated 8 July 2020, I opined that the US equity bull market was “back, broad, and bold.” With the S&P 500 Index now up more than 50% from its March 23 low, I think that description more or less remains accurate as the summer winds down.

The market’s seemingly relentless march higher naturally begs the question of whether or not an equity bubble has formed. A lot of ink has been spilled in that direction lately, with many commentators (including some of my own colleagues) suggesting that we may indeed be in an equity bubble akin to that of 1999.

A large cohort of market participants appears to agree: The percentage of bearish respondents to the weekly AAII Investor Survey has stayed atop the 40% threshold long enough that its 40-week average is now at levels not seen since 2009. (Prior to that, it was in 2002 and 1990.) Interestingly, that 40-week average actually…

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

Multiple US companies have now bounded through the previously unpenetrated US$1 trillion market-capitalization ceiling. In our view, the size of these ‘mega-cap’ companies could make future growth more difficult to come by compared to their midsize counterparts. The select group is now made up of four companies — Microsoft, Apple, Amazon, and Google — with an average market cap for the group of US$1.4 trillion. It sounds like a big number, but how much is a trillion dollars?

  • US$1 trillion in US$100 bills stacked together would reach 631 miles high. Most commercial airplanes fly at six miles and the International Space Station orbits at 200 miles above Earth.
  • There are about a trillion dollars currently in circulation in the US.
  • The average elementary school teacher’s salary in the US is US$58,230. With approximately two million elementary school teachers, US$1 trillion would cover their salaries for about nine years.1

The future beyond the trillion-dollar ceiling

Although one trillion is already a large market-cap milestone, for investors to continue to make high returns from here, the numbers need to…

MARKETS
Mark Whitaker
Equity Portfolio Manager
Boston

In my last blog post from June, I encouraged readers to look beyond China for emerging market (EM) equity opportunities against the supportive macro backdrop of unprecedented global stimulus, a low but improving purchasing managers’ index (PMI), and a weaker US dollar. I recommended that investors favor corporate business models that are likely to deliver resilient, better-than-expected earnings growth going forward.

Fast forward to August: I remain constructive on EM equities overall and believe we are on the cusp of several quarters of EM earnings recovery and upgrades.

What has changed since June?

Back in June, I believed that the countries on the clearest recovery paths from COVID-19 — North Asian markets like China, South Korea, and Taiwan — warranted the largest EM exposures in investor portfolios. At the time, I also suggested that…

MARKETS
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

In my last blog post, I described how the shifting composition of the US equity market over the past 20 or 30 years has caused the S&P 500 Index to look more and more like a bond every day. Broadly speaking, there is now a far greater percentage of companies with “annuity-like” profits – recurring, scalable, and not capex-heavy to maintain.

This evolution has potentially important implications for the relationship between bond yields and stock prices. In short, I argued, a case can be made that low yields (like today’s) do in fact justify high stock prices (again, like today’s).

The more I think about it, the more sense it makes. After all, with government bonds and other areas of fixed income sporting record-low yields in today’s environment, why wouldn’t income-oriented investors…

MACRO
MARKETS
Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston

Calls for the impending collapse of growth equities, particularly tech stocks, are getting louder as the market marches higher and the share of the biggest tech players grows larger. Recent investor concerns have focused on frenzied retail trading, high trading volume generally, and the dramatic rise in valuations since late March.

I agree that valuations among the tech leaders are at expensive levels relative to their history. I also concede that the growth segment of the market has taken on some speculative characteristics of late. However, what to do about it is another matter entirely. Go into cash at 0%? Rotate into bonds yielding 60 basis points? Move into more defensive equity sectors? Shift from growth- to value-style investing?

My answer is to not wholesale exit the market, but rather to reassess…

MARKETS
Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston
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Counterintuitive though it may seem at first blush, I believe the answer is yes. Why? China’s sensitivity to global trade is actually much lower than many investors may realize (Figure 1).

Figure 1

Trade concerns are likely overdone

So while talk of trade wars, tariffs, and US-China investment limits may rattle markets, I believe high-quality, domestically exposed Chinese equities are well positioned to climb this “wall of worry.”

MACRO

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Philip Brooks
Philip Brooks
CFA
Equity Investment Director
Singapore
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