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

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…

THEMES
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…

MACRO
THEMES
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

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…

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

My colleague, Derivatives Strategist Brian Hughes, recently likened today’s market behavior to a duck: placid on the surface, but legs beating like crazy below. This metaphor highlights how the alpha experience of managers has been volatile, while the activity at the market level has looked quite muted by comparison. Our team, leveraging recent insights from Macro Strategist Juhi Dhawan, believes this is a symptom of a market that changes its mind frequently regarding what path the economy is actually on. Are we heading for a sustained recovery, or will the economy wilt once the US Federal Reserve (Fed) starts to taper its asset purchases? Should we be more focused on inflation upside risk or whether China’s struggles might lead to deflation? Is there additional fiscal stimulus on the way, or will the Delta variant get us first? There are seemingly countless “A or B” narratives.

The market has appeared to be more prone to these types of shifting narratives for the past four or five years. This has particularly been the case since the onset of COVID-19 in March 2020. The nature of this uncertainty means there may not be clear trades from the below insights. However, we hope they provide some historical context for the market we’re experiencing and some solace for investors who feel like…

MARKETS
Gordy Lawrence
CFA
Director of Global Derivatives
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…

MARKETS
THEMES
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…

MARKETS
THEMES
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…

MARKETS
THEMES
Jun Oh
Equity Portfolio Manager
Hong Kong

In their June 2021 paper, Why fragility is the new reality for the stock market, our colleagues Brian Hughes and Gordy Lawrence conclude that: ”An imbalance has developed between the supply of and demand for liquidity, and as a result we’ve seen a significant increase in the potential for the public equity market to jump from a state of calm to one of chaos.”

Within our global trading department, we couldn’t agree more. Here are our latest thoughts from a trading perspective on ways to potentially navigate those states of “chaos” that may arise, often unexpectedly, amid market shocks or bouts of heightened…

Plagued by a combination of disappointing returns, heightened volatility, global trade wars, and (most recently) the COVID-19 crisis and regulatory uncertainty, emerging markets (EM) equities have been decidedly unpopular with many investors for years now. But during that time, the EM investment opportunity set has grown and expanded significantly, making EM equities fertile ground for investors seeking enhanced portfolio diversification and strong performance potential.

We believe differentiated actively managed investment strategies rooted in fundamental research are best positioned to access and capitalize on this attractive, but often-inefficient, asset class. In fact, we think investors who adhere to passive, benchmark-driven EM equity allocations may be missing out on full exploitation of the available opportunity set.

Here are seven reasons why, in our view, EM equity investors should favor active management, in spite of…

MARKETS
Andrew Sharp-Paul
Investment Director
Singapore

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…

MARKETS
THEMES
Juanjuan Niska
Juanjuan Niska
CFA
Global Industry Analyst
Boston, MA
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Over the past several weeks, a number of high-profile individual stocks have experienced what many observers see as retail-driven, options-assisted “melt-ups.” Most of these stocks have rallied at least 25% – 50%, including one outlier that has garnered the most attention with its breathtaking run in recent weeks and a quadruple-digit year-to-date return as of this writing.

This meteoric stock rise and others have seemingly defied logic and left many institutional investors scratching their heads, concerned that we may be in for a replay of what we saw earlier this year. I think that’s unlikely.

In January 2021, a handful of “meme stocks” experienced similar upside moves, which caught many hedge fund managers by surprise, triggering widespread…

MARKETS

ARCHIVED

Gordy Lawrence
CFA
Director of Global Derivatives
Boston

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

ARCHIVED

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

MARKETS

ARCHIVED

Eugene Khmelnik
Eugene Khmelnik
Global Industry Analyst
Boston

“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
MARKETS

ARCHIVED

Nick Petrucelli
Nick Petrucelli
CFA
Portfolio Manager
Boston

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

ARCHIVED

Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston
Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

The relative performance of the managed care industry has struggled somewhat over the past several months, begging the question: What’s the prognosis from here? Following in-line fourth-quarter 2020 earnings releases and conservative 2021 outlooks from most managed care organizations (MCOs), the short answer is: Probably better than many investors think.

Most MCOs have been sounding the same theme around forward guidance lately, citing an array of opposing forces amid the ongoing COVID-19 pandemic. Of course, no two MCOs are exactly alike. The magnitude of the headwinds and tailwinds in each case depends on company-specific factors, including the MCO’s mix of exposures (i.e., commercial, Medicare, Medicaid).

However, I believe many of the headwinds facing the group are likely to be…

MARKETS
THEMES

ARCHIVED

David Khtikian
David Khtikian
CFA
Global Industry Analyst
Boston

In a recent blog post, I looked at long-term (10-year) performance patterns of value and growth equities and argued that, despite poor recent results, value is likely to outperform over the next decade.

In a similar vein, I’ve been having discussions with asset owners about the performance differential between US and non-US equities. As with value and growth, the data shows a clear trend of US outperformance. For example, US equities have outperformed EAFE equities on a one-, three-, five-, 10-, and 30-year basis. Over the last decade, the US has outpaced EAFE by 8.1% per year — a substantial margin.1

In the value/growth analysis, historical data showed that outperformance tended to flip-flop from…

MARKETS

ARCHIVED

Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston

As investors scrutinize sky-high prices in some areas of today’s equity market, comparisons with the dot-com bubble of the late 1990s are common. Having lived through both periods, I see some important differences between the two environments, as well as some potential lessons from the dot-com sell-off.

The dot-com bubble was a twofer

Obviously, the heat and light of the bubble we saw in 1999 was the internet sector, with established players and startups trading at crazy valuations that often were not linked to earnings, cash flow, or even revenue. A tidal wave of oversubscribed IPOs was a big part of the picture as well. However, I would argue that the broader market was…

MARKETS

ARCHIVED

Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston

As investors scrutinize sky-high prices in some areas of today’s equity market, comparisons with the dot-com bubble of the late 1990s are common. Having lived through both periods, I see some important differences between the two environments, as well as some potential lessons from the dot-com sell-off.

The dot-com bubble was a twofer

Obviously, the heat and light of the bubble we saw in 1999 was the internet sector, with established players and startups trading at crazy valuations that often were not linked to earnings, cash flow, or even revenue. A tidal wave of oversubscribed IPOs was a big part of the picture as well. However, I would argue that the broader market was…

MARKETS

ARCHIVED

Adam Berger
Adam Berger
CFA
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

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Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston
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