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Website Terms of use:

You are about to enter a website for professional investors (as defined in the Markets and Financial Instruments Directive 2014/65/EU as amended or updated (“MiFID”)) including financial advisers and/or intermediaries and the information contained herein is not suitable for retail clients. Any person unable to accept these terms and conditions should not proceed any further. Before making any investment decision, you shall read carefully the offering documents of each Fund.

The use of Wellingtonfunds.com (this “Website”) is subject to the following terms and conditions (the “Terms”). After you have read and understood these Terms, you may click “Accept” to confirm that you agree to the Terms.

By clicking “Accept” you:

(i) expressly acknowledge that you have read and understood the Terms and agree to abide by them;

(ii) represent and warrant that the jurisdiction you have selected is the applicable jurisdiction for the intended investment activities, and that you are not resident in the United States of America and are not a U.S. Person;

(iii) confirm that you are accessing this Website in compliance with the laws and regulations of the jurisdiction you have selected, and all other applicable laws, rules and regulations;

(iv) represent and warrant, if applicable, that you are authorised to accept these Terms and use or access (or attempt to use or access) this Website on behalf of your employer, your client, or both, and that in doing so you are acting within the scope of your duties and, at all times, on behalf of your employer, your client or both; and

(v) hereby represent and warrant that you are not a private investor or retail client as categorised under MiFID) and that you shall not in any circumstances use or rely on any information displayed on this Website for your own personal investment use.

If you do not agree with these Terms you must refrain from using this Website.

In these Terms, references to “you” and “your” are references to any person using or accessing (or attempting to use or access) this Website or, as the context requires, the legal entity on whose behalf a user uses or accesses (or attempts to use or access) this Website. References to “Wellington Management”, “we” and “us” are references to Wellington Management International Limited.

By entering this Website, you acknowledge and agree to be bound by each of the Terms, together with any additional terms and conditions that apply to individual webpages, documents or other attachments contained within this Website (together, the “Conditions of Use”). If there are any Conditions of Use that you do not understand or agree with, you must leave this Website or the webpage in question (as applicable) immediately and delete immediately from the memory of your computer all documents from this Website.

  1. About this Website: The information on this Website is issued and communicated by Wellington Management International Limited (“Wellington Management,” “we” and “us”), which is authorised and regulated by the Financial Conduct Authority of the United Kingdom. This Website contains information about various umbrella funds (each an “Umbrella Fund” and together the “Umbrella Funds”) and their sub-funds (the “Funds”) which have been registered, or otherwise notified, for public distribution and marketing in the jurisdiction you have selected.

    Please note that the fact of such registration or notification does not mean that any regulator (including the Commission de Surveillance de Secteur Financier (CSSF) or any national regulator of your jurisdiction) has determined that the Funds are suitable for all or any investors. The Funds referred to on this Website may not be suitable investments for you and you should therefore seek professional investment advice before making a decision to invest in any of the Funds.

    Before making any investment decision read carefully the offering documents of each Fund.

  2. Access to this Website: In order to access this Website, you have been asked to select the jurisdiction which is applicable for the intended investment activities. Your selection will be used to determine the information that you will be able to access on this Website. You hereby represent and warrant to Wellington Management that the information that you have provided is true, accurate and complete and you undertake to notify us of any change to such information. Failure to provide us with accurate information will be treated as a material breach of these Terms. Certain Funds may not be available in all geographical locations and so information about certain Funds may not be available to all users of this Website. You must not attempt to gain access to areas of this Website other than those made available to users in the jurisdiction you selected. If the jurisdiction you should select changes, you must access this Website selecting your new jurisdiction. You should be aware that this may result in you not being able to access (i) information in relation to the same Funds as previously, or (ii) any information at all. Please note that the fact of selecting a jurisdiction does not mean that all or any of the Funds in relation to which information is made available, have been deemed suitable for you.

    When using this Website you must comply with all applicable local, national and international laws and regulations including those related to data privacy, international communications and exportation of technical or personal data. It may be unlawful to access or download the information contained on this Website in certain countries and the Umbrella Funds, Wellington Management and its affiliates disclaim all responsibility if you access or download any information from this Website in breach of any law or regulation of the United Kingdom, the jurisdiction in which you are residing or domiciled or the jurisdiction from which you access the Website.

    If you are acting as a financial adviser or intermediary, you agree to access this Website only for the purposes for which you are permitted to do so under applicable law. If you are acting as a financial adviser or intermediary and provide services to clients categorised as retail clients under MiFID, you agree that you will not share with or provide to your retail clients any information available on this Website that has not been approved for retail use and is not otherwise suitable for your retail clients.

    Wellington Management reserves the right to suspend or withdraw access to any page(s) included on this Website without notice at any time and accepts no liability if, for any reason, these pages are unavailable at any time or for any period.

  3. No Market Timing: You agree not to engage in any “market timing” practices with respect to your investment in any Fund and shall take all reasonable steps to ensure that no user authorised to access this Website on your behalf engages in any such market timing practices. For these purposes, “market timing” shall include engaging in any trading strategy with the intention of taking advantage of short term changes in market prices including (without limitation) by engaging in: (i) excessive trading, (ii) late trading or (iii) market abuse.

  4. U.S. Persons: Interests in the Funds are not being offered, and will not be sold, within the United States or to, or for the account or benefit of, any U.S. Person. The term U.S. Person shall have the meaning given to it in Regulation S under the United States Securities Act of 1933, as amended, and includes, among other things, U.S. residents and U.S. corporations and partnerships.

  5. Selling Restrictions: The distribution of the information and documentation on this Website may be restricted by law in certain countries. This Website, and the information and documentation on it, are not addressed to any person resident in the territory of any jurisdiction where such distribution would be contrary to local law or regulation. Not all the Funds in relation to which information is available on this Website are available in all geographical locations and so not all areas of this Website will be accessible to all users. The Funds are not available, and offering materials relating to them will not be distributed, to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation.

  6. No Investment Advice: The information on this Website is provided for information only and on the basis that you will make your own investment decisions.

    Nothing contained on this Website constitutes, and nothing on this Website should be construed as, investment advice or a recommendation to buy, sell, hold or otherwise transact in any investment including interests in the Funds. It is strongly recommended that you seek professional investment advice before making any investment decision.

    Unless agreed separately in writing with a client, Wellington Management and its affiliates neither provide investment advice to nor receive and transmit orders from investors in the Funds nor do they carry on any other activities with or for such investors that constitute “investment services” or “ancillary services” for the purposes of MiFID.

    You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision. You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to the subscription, holding, transfer or disposal of interests in the Funds.

  7. Past Performance; Forecast; Simulation: To the extent that this Website contains any information regarding the past performance and/or forecast of the Funds, such information is not a reliable indicator of future performance of these Funds and should not be relied upon as a basis for an investment decision.

    To the extent that this Website contains any information regarding simulated past performance, such information is not a reliable indicator of future performance and should not be relied on as the basis for an investment decision. Investment results for each Fund may vary.

    The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested and may lose all of their investment. The value of investments in the Funds may be affected by the price of underlying investments. Exchange rate changes may cause the value of overseas investments to rise or fall.

  8. Price Information: All prices or values may not reflect actual prices or values that would be available in the market at the time provided or at the time you may decide to purchase or sell an interest in a particular Fund.

  9. Risk Warnings: There are significant risks associated with an investment in any of the Funds. Investment in the Funds is intended only for those investors who can accept the risks associated with such an investment (including the risk of a complete loss of investment).You should ensure that you have fully understood such risks before taking any decision to invest.

    Investments in the Funds are neither insured nor guaranteed by any investor compensation scheme and are not deposits or obligations of, or guaranteed by, any entity within the Wellington Management group.

    These Terms do not represent a complete statement of the risk factors associated with an investment in the Funds. The offering documents for each Fund contain risk warnings which are specific to the relevant Fund. You should consider these risk warnings carefully and take appropriate investment advice before taking any decision to invest.

  10. Offering Documents: The terms of any investment in a Fund are governed by the documents establishing such terms. An application for interests in any of the Funds should only be made having fully and carefully read the offering documents, which are the relevant offering memorandum, the latest financial reports and any other offering documents for the relevant Fund which are available on this Website and upon request from the fund representative in your jurisdiction and specified in the offering memorandum for the relevant Fund.

    It is your responsibility to use the offering documents and by making an application to invest in a Fund you will represent that you have read the offering memorandum for the relevant Fund, the appropriate key investor information document for the Fund and any other applicable offering document and will agree to be bound by its contents.

  11. Information on this Website: This Website, and the information on it, are provided for information purposes only and do not constitute an invitation, offer or solicitation to engage in any investment activity including to buy, hold or sell any investment including any interests in the Funds.

    The information on this Website is provided in good faith and reasonable care has been taken to ensure that such information is accurate, current and fit for its intended purpose. To the extent that any information on this Website relates to a third party, this information has been provided by that third party and is the sole responsibility of such third party and, as such, Wellington Management and its affiliates accept no liability for such information.[ No representation or warranty of any kind regarding the accuracy, adequacy, validity, completeness or timeliness of the information on this Website or the error-free use of this Website is given and, to the extent permitted by applicable laws, no liability is accepted for the accuracy or completeness of such information. No warranty of any kind, express or implied, including but not limited to the warranties of non-infringement of third-party rights, title, merchantability, fitness for a particular purpose, and freedom from computer virus is given in conjunction with the information, materials, products, and services on the Website. 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. Wellington Management does not warrant that the Website will meet your needs. You agree to assume the entire risk as to your use of the Website. Any person who acts upon, or changes his investment position in reliance on information contained on this Website, does so entirely at his own risk. In the event of any inconsistency between the information on this Website and the terms of the relevant offering documents, the terms of the offering document shall prevail.

    All content on the Website is subject to modification from time to time without notice save for any mandatory disclosure requirements. Please contact Wellington Management (using the details in the “Contact Us” section below) for further information regarding the validity of any information contained on this Website. This Website and most of the documentation contained within it is provided in the English language and you represent and warrant that you understand the English language.

    The Website is limited to funds and sub-funds (and related information and documents) which have been authorised for sale.

  12. Conflicts of Interest: Wellington Management, its affiliates and their directors, officers, employees or clients may have or have had interests or long or short positions in any investment product or other financial instruments underlying any investment product referred to on this Website and may at any time make purchases and/or sales in them as principal or agent. In addition, Wellington Management and/or its affiliates may act or have acted as market maker in any investment product, or financial instruments underlying such investment product or entered into an arrangement to hedge the market risk associated with the investment products. The Wellington Management group has conflicts of interest policies in place which specify the procedures that they follow and the measures that they have adopted in order to avoid such conflicts or to manage such conflicts in a way that ensures fair treatment for clients.

  13. Monetary Benefits: You agree that we may, to the extent permitted by applicable laws and regulations, share charges or commission with affiliates of Wellington Management or other third parties, or receive remuneration from them, in respect of transactions you carry out in relation to the Funds described on this Website. Where relevant, we may disclose such arrangements to you. Details of any such arrangements are available on request.

  14. Liability: No warranty is given that the contents of this Website are compatible with all computer systems or browsers or that this Website shall be available on an uninterrupted basis.

    The internet is not a completely reliable transmission medium and none of the Umbrella Funds, Wellington Management or any of its affiliates accept any liability for any data transmission errors such as data loss or damage or alteration of any kind or for the security or confidentiality of information transmitted across the internet to or from the Umbrella Funds, Wellington Management or any of its affiliates. Any such transmission of information is entirely at your own risk and any material downloaded from this Website is downloaded at your own risk.

    The information on this Website is provided “as is” and “as available”. To the extent permitted by law, no guarantee or representation, express or implied, is made as to the accuracy, validity, timeliness, completeness or continued availability of any information made available on the Website The Umbrella Funds, Wellington Management, its affiliates and each of their directors, officers, employees and/or agents expressly exclude all conditions, warranties, representations, and other terms which might otherwise be implied by statute, common law or the law of equity to the fullest extent permitted by applicable law or regulation.

    In no event will the Umbrella Funds, Wellington Management, or any of its affiliates be liable to any person for any direct, indirect, special or consequential damages, losses or liabilities arising out of any use of, or inability to use, this Website or the information contained on it including, without limitation, lost profits, business interruption, any failure of performance, error, omission, interruption, defect, delay in operation or transmission, computer virus, line or system failure, loss of programs or data on your equipment or otherwise, even if the Umbrella Funds, Wellington Management or its affiliates is expressly advised of the possibility or likelihood of such damages, losses or liabilities, unless such damages, losses or liabilities are due to the Umbrella Funds’, Wellington Management’s or its affiliates’ negligence, willful default, fraud or material breach of the Umbrella Funds’, Wellington Management’s or its affiliates’ obligations under applicable law or regulation.

    This does not affect the liability of the Umbrella Funds, Wellington Management, or its affiliates for any loss or damage which cannot be excluded or limited under applicable law.

  15. Indemnification: As a condition of your use of the Website, you agree to indemnify and hold the Umbrella Funds, Wellington Management, and its affiliates, and their respective partners, directors, employees, and agents harmless from and against any and all claims, losses, liability, costs, and expenses (including but not limited to legal fees) arising from your use of the Website or from your violation of these Terms unless such claims, losses, liability, costs or expenses are due to the Umbrella Funds’, Wellington Management’s or its affiliates’ negligence, willful default, fraud or material breach of the Umbrella Funds’, Wellington Management’s or its affiliates’ obligations under applicable law or regulation.

  16. Intellectual Property: The entire content of this Website is subject to copyright with all rights reserved. All materials on this Website are owned or licensed by the Umbrella Funds, Wellington Management, its affiliates and/or its third-party providers and are protected by UK and international intellectual property laws. Unless otherwise indicated, all service marks, trademarks, and logos appearing on this Website are the exclusive property of the Wellington Management group. You may not copy, display, distribute, download, license, modify, publish, repost, reproduce, sell, transmit, and use to create a derivative work, or otherwise use for public or commercial purposes the content of this Website without the prior written permission of Wellington Management.

  17. Privacy: Please see our privacy policy which is contained on this Website for information about how the Wellington Management group protects your personal data, including personal data collected through this Website. You will be asked to agree to the terms of our privacy policy when selecting your relevant jurisdiction.

  18. Cookies: When you visit this Website, a Wellington Management group company server will record your IP address together with the date, time, page visited and duration of your visit. Please note that the Wellington Management group uses cookies on this section of the Website. Cookies are small pieces of software that are issued to your computer or device and that store and sometimes track information about your use of the site. Cookies on this Website may collect a unique identifier, user preferences and profile information and membership information from which it is possible to identify individual users. The Wellington Management group also uses cookies to collect general usage and volume statistical information that does not include personally identifiable information. Some cookies may remain on the user’s computer after they leave this Website (these are known as persistent cookies). For more information about cookies including how to set your internet browser to reject cookies, please go to www.allaboutcookies.org or http://youronlinechoices.eu.

    By using this Website, you agree that the Wellington Management group can place cookies on your device which collect the data and for the purposes described above and as further detailed in the Cookie Policy. If you delete cookies relating to this Website, we will not remember things about you, you will be treated as a first-time visitor the next time you visit this Website and we will not be able to tailor your experience of this Website.

    The Wellington Management group has engaged one or more third party service providers to track and analyze usage and volume statistical information from visitors to this Website. The service provider(s) set cookies on behalf of the Wellington Management group. The Wellington Management group may re-associate the information provided by the technologies directly above with other personal information we hold about you. By using this Website, you agree that third parties can place cookies on your device as described above.

  19. Your use of this Website: You must not use this Website (or permit or procure others to use it) as follows:

    • for any unlawful, improper or illegal purpose or activity;
    • to communicate or receive information that is obscene, indecent, pornographic, sadistic, cruel, or racist in content, of a sexually explicit or graphic nature, which promotes or incites discrimination, hatred or racism or which might be legally actionable for any reason;
    • in a manner intended to threaten, harass, or intimidate;
    • to violate Wellington Management’s or any third party’s copyright, trademark, proprietary or other intellectual property rights;
    • to damage Wellington Management’s name or reputation or that of Wellington Management’s affiliated companies or any third parties;
    • to impersonate any of Wellington Management’s employees or other person or use a false name while using this Website or implying an association with Wellington Management;
    • to penetrate Wellington Management’s security measures or other entities’ systems (“hacking”);
    • to transmit unsolicited voluminous emails (for example, spamming) or to intercept, interfere with or redirect email intended for others using this Website;
    • to generate excessive amounts of internet traffic, to interfere with Wellington Management’s network or other’s use of this Website or to engage in activities designed to, or having the effect of, degrading or denying service to other users of this Website or others;
    • to introduce viruses, worms, harmful code and/or Trojan horses onto the internet or into this Website or any other entity’s systems and it is your responsibility to ensure that whatever you download or select for your use from this Website is free from such items;
    • to post or transmit information that is defamatory, fraudulent or deceptive including, but not limited to, scams such as “make-money-fast” schemes or “pyramid/chain” letters; and/or
    • to transmit confidential or proprietary information, except solely at your own risk.
  20. Linked Websites: Links to websites operated by third parties are provided for information only and do not constitute any form of advice, endorsement or recommendation of such websites or the material on them. Wellington Management accepts no responsibility for information contained on any other sites which can be accessed by hypertext link from this Website or for these sites not being available at all times. Any use that you make of such websites and information is at your own risk. Please note that when you click on any external site hypertext link you will leave this Website. You should review the privacy statements of such websites before you provide any personal or confidential information.

  21. Website Security and Restrictions on Use: As a condition to your use of this Website, you agree that you will not, and you will not take any action intended to: (i) access data that is not intended for you; (ii) invade the privacy of, obtain the identity of, or obtain any personal information about any other user of this Website; (iii) probe, scan, or test the vulnerability of this Website or Wellington Management’s network or breach security or authentication measures without proper authorisation; (iv) attempt to interfere with service to any user, host, or network or otherwise attempt to disrupt our business; or (v) send unsolicited mail, including promotions and/or advertising of products and services. Unauthorised use of the Website, including but not limited to unauthorised entry into Wellington Management’s systems or misuse of any information posted to a web site, is strictly prohibited.

  22. Website Security and Restrictions on Use: As a condition to your use of this Website, you agree that you will not, and you will not take any action intended to: (i) access data that is not intended for you; (ii) invade the privacy of, obtain the identity of, or obtain any personal information about any other user of this Website; (iii) probe, scan, or test the vulnerability of this Website or Wellington Management’s network or breach security or authentication measures without proper authorisation; (iv) attempt to interfere with service to any user, host, or network or otherwise attempt to disrupt our business; or (v) send unsolicited mail, including promotions and/or advertising of products and services. Unauthorised use of the Website, including but not limited to unauthorised entry into Wellington Management’s systems or misuse of any information posted to a web site, is strictly prohibited.

  23. Third Parties: The Umbrella Funds, Wellington Management, and its affiliates shall have the benefit of the rights conferred on them by these Terms but otherwise no person who is not a party to these Terms may enforce its terms under the Contracts (Rights of Third Parties) Act 1999.

  24. Applicable Law: These Terms and any non-contractual obligations arising from or connected with them shall be governed by, and these Terms shall be construed in accordance with, the laws of England and Wales.

  25. Jurisdiction: You agree that the English courts shall have exclusive jurisdiction in relation to any legal action or proceedings arising out of or in connection with these Terms (whether arising out of or in connection with contractual or non-contractual obligations) (“Proceedings”) and waive any objection to Proceedings in such courts on the grounds of venue or on the grounds that Proceedings have been brought in an inappropriate forum. You further agree that this paragraph operates for the benefit of the Umbrella Funds, or Wellington Management and accordingly the Umbrella Funds, or Wellington Management shall be entitled to take Proceedings in any other court or courts having jurisdiction.

  26. Specific information for Spanish investors: Wellington Management International Limited is registered in the Spanish Securities Market Commission – Comision Nacional del Mercado de Valores (“CNMV”) with number 874, to provide investment services on a cross border basis. The Funds are registered in the CNMV for sale to professional investors and registration numbers may be found on the Website. The distributors in Spain of Funds registered in the corresponding CNMV Registry must provide to each unit-holder or shareholder, prior to subscribing units or shares in the Funds, a copy of the simplified prospectus or the document substituting it ( when applicable) and a copy of the latest published annual report and accounts. Delivery of these documents is mandatory and cannot be waived by the unit-holder or the shareholder. In addition, an updated copy of other official documentation of the Funds must be provided upon request. In any event at least one of the distributors will make available by electronic means all the documents, as well as the net asset values corresponding to the share or units marketed in Spain.

  27. About Wellington Management International Limited and the Umbrella Funds. Wellington Management International Limited is authorised and regulated by the Financial Conduct Authority of the United Kingdom and is entered on the register maintained by the Financial Conduct Authority and the Prudential Regulation Authority(Reference number: 208573). Its registered office is at Cardinal Place, 80 Victoria Street, London SW1E 5JL, United Kingdom and its VAT number is GB420309205. Wellington Management International Limited is an appointed distributor to the Funds.

    Wellington Management Funds (Luxembourg) II is an open-ended unincorporated mutual investment fund (fonds commun de placement) and is governed by the Luxembourg Law of 13th February 2007 on specialised investment funds, as amended from time to time, and qualifies as an AIF.

    Wellington Management Funds (Luxembourg) II SICAV is an open-ended investment company with variable capital (societe d’investestissement a capital variable) and is governed by Luxembourg Law of 13th February 2007 on specialised investment funds, as amended from time to time, and qualifies as an AIF.

    Wellington Luxembourg S.à r.l. is the appointed management company of Wellington Management Funds (Luxembourg) and alternative investment fund manager of Wellington Management Funds (Luxembourg) II and Wellington Management Funds (Luxembourg) II SICAV. Wellington Luxembourg S.à r.l. is a société à responsabilité limitée registered in Luxembourg and authorised by the Commission de Surveillance du Secteur Financier (the CSSF) as a management company authorised under chapter 15 of the Luxembourg law of 17 December 2010 on undertakings for collective investment, as amended. Wellington Luxembourg S.à r.l.’s registered address is at 33, Avenue de la Liberté, L-1931 Luxembourg.

  28. Contact Us: If you have any enquiries in relation to this Website or the information on it, please contact Wellington at infofunds@wellington.com.

Effective as of 21 August 2019

You are about to enter a website for qualified and professional investors including financial advisors / intermediaries and the information contained herein is not suitable for retail investors. Any person unable to accept these terms and conditions should not proceed any further.

 The use of Wellingtonfunds.com (this “Website”) is subject to the following terms and conditions (the “Terms”). After you have read and understood these Terms, you may click “Accept” to confirm that you agree to the Terms.

 By clicking “Accept” you:

(i) expressly acknowledge that you have read and understood the Terms and agree to abide by them;

(ii) represent and warrant that the jurisdiction you have selected is the applicable jurisdiction for the intended investment activities, and that you are not resident in the United States of America and are not a U.S. Person;

(iii) confirm that you are accessing this Website in compliance with the laws and regulations of the jurisdiction you have selected, and all other applicable laws, rules and regulations;

(iv) represent and warrant, if applicable, that you are authorised to accept these Terms and use or access (or attempt to use or access) this Website on behalf of your employer, your client, or both, and that in doing so you are acting within the scope of your duties and, at all times, on behalf of your employer, your client or both; and

(v) hereby represent and warrant that you are not a private investor or retail client (as defined in the Markets and Financial Instruments Directive 2014/65/EC as amended or updated (“MiFID”)) and that you shall not in any circumstances use or rely on any information displayed on this Website for your own personal investment use. 

If you do not agree with these Terms you must refrain from using this Website.

In these Terms, references to “you” and “your” are references to any person using or accessing (or attempting to use or access) this Website or, as the context requires, the legal entity on whose behalf a user uses or accesses (or attempts to use or access) this Website. References to “Wellington Management”, “we” and “us” are references to Wellington Management Switzerland GmbH. 

By entering this Website, you acknowledge and agree to be bound by each of the following terms and conditions, together with any additional terms and conditions that apply to individual webpages, documents or other attachments contained within this Website (together, the “Conditions of Use”). If there are any Conditions of Use that you do not understand or agree with, you must leave this Website or the webpage in question (as applicable) immediately and delete immediately from the memory of your computer all documents from this Website.

  1. About this Website: The information on this Website is issued and communicated by Wellington Management Switzerland GmbH (“Wellington Management,” we” and “us”), which is registered at the commercial register of the canton of Zurich with number CH-020.4.050.857-7 and which holds a distribution license from the Swiss Financial Market Supervisory Authority (“FINMA”), as a fund distributor. This Website contains information about various umbrella funds (each an “Umbrella Fund” and together the “Umbrella Funds”) and their sub-funds (the “Funds”) which have been registered, or otherwise notified, for public distribution and marketing in the jurisdiction you have selected. 

    Please note that the fact of such registration or notification does not mean that any regulator (including the Swiss Financial Market Supervisory Authority, the Commission de Surveillance de Secteur Financier (CSSF) or any national regulator of your jurisdiction) has determined that the Funds are suitable for all or any investors. The Funds referred to on this Website may not be suitable investments for you and you should therefore seek professional investment advice before making a decision to invest in any of the Funds.

    Before making any investment decision read carefully the offering documents of each Fund.

  2. Access to this Website: In order to access this Website, you have been asked to select the jurisdiction which is applicable for the intended investment activities. Your selection will be used to determine the information that you will be able to access on this Website. You hereby represent and warrant to Wellington Management that the information that you have provided is true, accurate and complete and you undertake to notify us of any change to such information. Failure to provide us with accurate information will be treated as a material breach of these Terms. Certain Funds may not be available in all geographical locations and so information about certain Funds may not be available to all users of this Website. You must not attempt to gain access to areas of this Website other than those made available to users in the jurisdiction you selected. If the jurisdiction you should select changes, you must access this Website selecting your new jurisdiction. You should be aware that this may result in you not being able to access (i) information in relation to the same Funds as previously, or (ii) any information at all. Please note that the fact of selecting a jurisdiction does not mean that all or any of the Funds in relation to which information is made available, have been deemed suitable for you. 

    When using this Website you must comply with all applicable local, national and international laws and regulations including those related to data privacy, international communications and exportation of technical or personal data. It may be unlawful to access or download the information contained on this Website in certain countries and the Umbrella Funds, Wellington Management and its affiliates disclaim all responsibility if you access or download any information from this Website in breach of any law or regulation of the United Kingdom, the jurisdiction in which you are residing or domiciled or the jurisdiction from which you access the Website. 

    If you are acting as a financial adviser or intermediary, you agree to access this Website only for the purposes for which you are permitted to do so under applicable law. If you are acting as a financial adviser or intermediary and provide services to clients categorised as retail clients under the MiFID, you agree that you will not share with or provide to your retail clients any information available on this Website that has not been approved for retail use and is not otherwise suitable for your retail clients. 

    Wellington Management reserves the right to suspend or withdraw access to any page(s) included on this Website without notice at any time and accepts no liability if, for any reason, these pages are unavailable at any time or for any period.

  3. No Market Timing: You agree not to engage in any “market timing” practices with respect to your investment in any Fund and shall take all reasonable steps to ensure that no user authorised to access this Website on your behalf engages in any such market timing practices. For these purposes, “market timing” shall include engaging in any trading strategy with the intention of taking advantage of short term changes in market prices including (without limitation) by engaging in: (i) excessive trading, (ii) late trading or (iii) market abuse.

  4. U.S. Persons: Interests in the Funds are not being offered, and will not be sold, within the United States or to, or for the account or benefit of, any U.S. Person. The term U.S. Person shall have the meaning given to it in Regulation S under the United States Securities Act of 1933, as amended, and includes, among other things, U.S. residents and U.S. corporations and partnerships.

  5. Selling Restrictions: The distribution of the information and documentation on this Website may be restricted by law in certain countries. This Website, and the information and documentation on it, are not addressed to any person resident in the territory of any jurisdiction where such distribution would be contrary to local law or regulation. Not all the Funds in relation to which information is available on this Website are available in all geographical locations and so not all areas of this Website will be accessible to all users. The Funds are not available, and offering materials relating to them will not be distributed, to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation. 

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Effective as of 21st August 2019

I ACCEPT I DECLINE

May 2020 | Multiple contributors

The coronavirus fallout: Insights from our investors

We’ve collected insights and unfinished ideas on the impact of the coronavirus from members of our macro, multi-asset, fixed income, equity, and commodities teams.

For professional, institutional and accredited investors only. The views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. While any third-party data used is considered reliable, its accuracy is not guaranteed. Forward-looking statements should not be considered as guarantees or predictions of future events. The value of your investment may become worth more or less than at the time of original investment. Past results are not a reliable indicator of future results. Commentary provided should not be viewed as a current or past recommendation and is not intended to constitute investment advice or an offer to buy or sell securities. Wellington assumes no duty to update any information in this material in the event that such information changes.

Please see the important disclosure page for more information.


Latest content

NEW How coronavirus in India may impact macro and climate policy
Complex and dynamic, India faces unique challenges from both the current public-health crisis and looming climate-related risks. In this 20-minute audiocast, we explore how India has managed the coronavirus thus far, and we look ahead to how its response may shape its climate policy. Finally, we consider the many investment risks and opportunities these issues represent.


Juhi Dhawan

NEW Deflation to reflation: Sketching the post-COVID policy path
Juhi Dhawan, PhD, Macro Strategist
Boston

Published: 28 May 2020

The debate over the “right policy mix” to combat the pandemic-driven economic disruption in the US will continue to take center stage in the months to come. I believe fiscal policy, in coordination with monetary policy, can put us on a path to reflation, and I would highlight three keys:

1. Near-term fiscal spending — With fiscal spending, the first priority is preventing a deeper recession (see my recent note, “US recession and the fiscal imperative”). Given the nature of this crisis, which resulted in a sudden shutdown of activity, the economic objective is to address cash-flow problems faced by consumers and companies. Thus, the government has spent on expanded unemployment benefits, direct checks to consumers, small-business grants, and paid sick leave. I think the reflation outcome will hinge on successful support for three groups especially impacted by this prolonged shutdown: small- and medium-sized enterprises (SMEs), whose cash position cannot withstand such a pronounced drop in revenues; state and local governments, which are required to balance their budgets; and low-income earners, who depend on their paychecks. These groups account for a large portion of US employment, and successful reflation efforts will mitigate the distress they face.

A few words on small businesses: A pillar of the economy (40% share) and job market (50% share), they have been especially hard hit by the health crisis. This was evident in demand for the first two rounds of the Payroll Protection Program, a lending initiative in the CARES Act that offers the option of changing the loan to a grant if 75% of proceeds are used to support payrolls. In my view, the greater the debt forgiveness for SMEs and the greater the flexibility in the use of such funds, the better the outlook for jobs and the faster the recovery.

2. Longer-term fiscal spending — This is about what comes after the crisis, as the economy opens and the focus shifts to recovery. The key will be sustaining accommodative fiscal policy after the worst has passed — to rebuild the economy and accelerate rehiring of displaced workers. The 2020 election makes the nature and magnitude of any post-crisis fiscal spending unclear, but I see a few areas of agreement. One is a desire to reduce dependence on China, which could mean rerouting supply chains toward the US. This trend is already evident in the United States-Mexico-Canada Agreement (effective starting this July), which requires, for example, a higher level of North American content in the automobile sector. Several health-related supply chains may also be rerouted, as the COVID-19 crisis has underscored the importance of having local products readily available in such a vital area of the economy.

Another point of general agreement across party lines is the need for spending on the aging US infrastructure, though details about size and scope (e.g., physical, green, or broadband infrastructure) will depend on who is in power. Spending that improves the quality of physical or online infrastructure and broadens its reach can encourage R&D, enhance productivity, and boost medium-term growth prospects.

On the flip side, a rush to raise taxes could be damaging. While it’s prudent to address deficits during expansions, tightening fiscal policy too early in a recovery would be counterproductive, since the best antidote for ailing government finances is sustained nominal growth.

3. Extending the Fed’s commitment — In responding to the crisis, the Fed continues to rewrite the rules with aggressive policy action, including establishing special-purpose vehicles to support corporate and asset-backed markets and offering a lending facility to municipalities and states. With the Fed’s immediate and committed response have come signs of healing in credit markets, money supply, lending, and inflation expectations.

More innovation is needed as the Fed steps up in its role of lender of last resort. The Main Street Lending Facility (announced but not yet activated) will be important to ensure funding for large swaths of the economy not directly involved in corporate bond markets. The uptake and impact of the program will depend to a great extent on its design (e.g., few restrictions on the use of funds borrowed).

I also expect the Fed to offer some form of forward guidance and shift the contours of its asset purchases. One way to strengthen guidance would be to use quantitative unemployment and inflation targets. Alternatively, the Fed could temporarily use an asymmetric operational range for inflation, where 2% is near the lower end of the range and the ultimate goal is to deliver a 2% average inflation target over an economic cycle. The Fed could also introduce front-end yield-curve caps for a time (committing to purchase securities at the shorter end of the Treasury curve if yields rise above a certain level), providing a clear signal of its commitment to accommodative policy.


Additional content

Our investment professionals actively share research and challenge one another’s views, creating a diverse marketplace of ideas. They decide independently how to draw on those ideas to sharpen their investment decisions, unconstrained by any single “house view.”

Macro views

Juhi Dhawan

NEW Deflation to reflation: Sketching the post-COVID policy path
Juhi Dhawan, PhD, Macro Strategist
Boston

Published: 28 May 2020

The debate over the “right policy mix” to combat the pandemic-driven economic disruption in the US will continue to take center stage in the months to come. I believe fiscal policy, in coordination with monetary policy, can put us on a path to reflation, and I would highlight three keys:

1. Near-term fiscal spending — With fiscal spending, the first priority is preventing a deeper recession (see my recent note, “US recession and the fiscal imperative”). Given the nature of this crisis, which resulted in a sudden shutdown of activity, the economic objective is to address cash-flow problems faced by consumers and companies. Thus, the government has spent on expanded unemployment benefits, direct checks to consumers, small-business grants, and paid sick leave. I think the reflation outcome will hinge on successful support for three groups especially impacted by this prolonged shutdown: small- and medium-sized enterprises (SMEs), whose cash position cannot withstand such a pronounced drop in revenues; state and local governments, which are required to balance their budgets; and low-income earners, who depend on their paychecks. These groups account for a large portion of US employment, and successful reflation efforts will mitigate the distress they face.

A few words on small businesses: A pillar of the economy (40% share) and job market (50% share), they have been especially hard hit by the health crisis. This was evident in demand for the first two rounds of the Payroll Protection Program, a lending initiative in the CARES Act that offers the option of changing the loan to a grant if 75% of proceeds are used to support payrolls. In my view, the greater the debt forgiveness for SMEs and the greater the flexibility in the use of such funds, the better the outlook for jobs and the faster the recovery.

2. Longer-term fiscal spending — This is about what comes after the crisis, as the economy opens and the focus shifts to recovery. The key will be sustaining accommodative fiscal policy after the worst has passed — to rebuild the economy and accelerate rehiring of displaced workers. The 2020 election makes the nature and magnitude of any post-crisis fiscal spending unclear, but I see a few areas of agreement. One is a desire to reduce dependence on China, which could mean rerouting supply chains toward the US. This trend is already evident in the United States-Mexico-Canada Agreement (effective starting this July), which requires, for example, a higher level of North American content in the automobile sector. Several health-related supply chains may also be rerouted, as the COVID-19 crisis has underscored the importance of having local products readily available in such a vital area of the economy.

Another point of general agreement across party lines is the need for spending on the aging US infrastructure, though details about size and scope (e.g., physical, green, or broadband infrastructure) will depend on who is in power. Spending that improves the quality of physical or online infrastructure and broadens its reach can encourage R&D, enhance productivity, and boost medium-term growth prospects.

On the flip side, a rush to raise taxes could be damaging. While it’s prudent to address deficits during expansions, tightening fiscal policy too early in a recovery would be counterproductive, since the best antidote for ailing government finances is sustained nominal growth.

3. Extending the Fed’s commitment — In responding to the crisis, the Fed continues to rewrite the rules with aggressive policy action, including establishing special-purpose vehicles to support corporate and asset-backed markets and offering a lending facility to municipalities and states. With the Fed’s immediate and committed response have come signs of healing in credit markets, money supply, lending, and inflation expectations.

More innovation is needed as the Fed steps up in its role of lender of last resort. The Main Street Lending Facility (announced but not yet activated) will be important to ensure funding for large swaths of the economy not directly involved in corporate bond markets. The uptake and impact of the program will depend to a great extent on its design (e.g., few restrictions on the use of funds borrowed).

I also expect the Fed to offer some form of forward guidance and shift the contours of its asset purchases. One way to strengthen guidance would be to use quantitative unemployment and inflation targets. Alternatively, the Fed could temporarily use an asymmetric operational range for inflation, where 2% is near the lower end of the range and the ultimate goal is to deliver a 2% average inflation target over an economic cycle. The Fed could also introduce front-end yield-curve caps for a time (committing to purchase securities at the shorter end of the Treasury curve if yields rise above a certain level), providing a clear signal of its commitment to accommodative policy.


Marion Pelata

Economy down but equities up: What are the assumptions?
Mario Pelata, Macro Strategist
London

Published: 5 May 2020

This year, the global economy is expected to contract at its sharpest rate since 1929. Yet the discussion is already shifting to how high equities can go. From a macro perspective, I believe equities can rally further only on the following assumptions: the market leads the economy; earnings in 2020 don’t matter; earnings in 2021 and beyond have repriced; and the fiscal and monetary stimulus measures will not only cap the downside but stimulate a strong recovery. I would question those assumptions.

What is the market focusing on today? The market tends to concentrate on just a few issues at a time. Currently, the focus seems to be on three: the flattening and slowing in the COVID-19 infection curve, which means lockdowns in many countries are closer to being relaxed; extreme bearishness in sentiment and positioning, which has so far supported the market rebound amid low trading volumes; and the level of intervention by central banks, which could boost asset inflation through portfolio effects. Investors’ nervousness around this rally is palpable, and positioning remains light. As a result, the market stabilisation may continue for some time, but the balance of risks over the long term still suggests caution.

What could be the next market narrative? In January 2010, the market quickly shifted from a strong cyclical recovery after the global financial crisis to a focus on rising government debt. Similarly, in the current environment, plenty of less supportive issues could come to dominate. These might include a resurgence of US-China trade tensions, the first bankruptcies of large-cap companies, a focus on moral hazard, concerns about fiscal austerity in 2021, more attention on the poor market performance in Japan and Europe despite heavy central bank intervention, a strong move in the US dollar (up or down) and an L-shaped recovery.

Does the market lead the economy? From the 1970s to the 1990s, market upturns generally led economic recoveries. Since 2000, however, that relationship has not been so clear. In fact, more often than not, the trough in the ISM Manufacturing Index has slightly led the turn in the S&P 500 Index. True, this recession is likely to be led by the services sector. But it is still a big step to expect a sustained divergence between the economy (persistent weakness) and the broad equity market (stable to up).

Do earnings matter? A significant discount in earnings tends to be necessary for the market to reach a conclusive turning point. Historically, equities have bottomed when the second derivative of earnings revisions has troughed. Given the unusual nature of this recession, many analysts have yet to change their earnings forecasts, and a stabilisation is probably months away. Furthermore, although the P/E ratio recovered faster than the price in 2008, the S&P 500 didn’t recover until earnings bottomed out in 2009. So far in this recession, earnings are pricing for a V-shaped recovery, with a material drop in 2020 earnings that is largely recovered in 2021. In my view, that is probably overoptimistic, as it prices with a high probability the most positive scenario, in a highly uncertain environment. But, even at these levels, it suggests a price range of 2000 – 2750 for the S&P 500, assuming the P/E ratio in 2021 stays in its recent range of 14 – 19.

Finally, does the degree of stimulus in the system point to a strong and, importantly, sustained recovery? Market leadership so far suggests that it’s more about monetary policy boosting financial assets than about a belief that the various fiscal packages will drive an economic recovery. In 2009, the value/growth ratio troughed on the same day as the S&P 500, and value led the market for almost six months. This time, economically sensitive sectors have underperformed growth-driven stocks, the yield curve is not significantly steeper, the US dollar is not yet on a clear downward trajectory, and high-yield bonds repriced only after intervention by the US Federal Reserve.

Is a fiscal or monetary boost always positive for equities? Not always — at least, not immediately. Since 2010, the market seems to have become quicker to reprice, but only temporarily. That could be either because the long-term effects of these policies haven’t been clear or because central bank intervention impairs market liquidity and adds not only a floor but a ceiling to market pricing. While the level of stimulus today is unprecedented, the second derivative of earnings revisions in the US is slowing down already. Given these boosts, financial assets should inflate. But, for the rally to be sustained and volatility to drop, we would still need growth in the real economy. And, despite a likely rebound in activity in the third quarter, I expect the level of activity globally to remain below its pre-crisis level well into 2021, though with a wide range of possible outcomes.


Jens Larsen

Update on the eurozone
Jens Larsen, Macro Strategist
London

Published: 24 April 2020

Deep recession and slow recovery, with political risks ahead

Challenges increase for the eurozone
Recent data and developments have altered my view of eurozone economies and equities, increasing and significant downside risk in my view. Doubts about the path ahead have increased, reflecting fundamental uncertainty about the health crisis, the policy response and the subsequent economic recovery. A deep recession, a slow recovery and a steep earnings recession could weigh on eurozone equities. Relative to the recent IMF forecasts, the eurozone is likely to experience a bigger dip and a shallower recovery.

Medium term: policy response will shape recovery
In the medium term — six months to two years — the quantity and quality of the policy support will determine both how fast growth can bounce back and how far longer-term damage through job and firm destruction is avoided.

ECB intervention
The ECB’s intervention is extensive, providing ample liquidity and purchasing assets at a high pace. Asset purchases can be scaled up if necessary and I am confident that the ECB will continue its asset purchases for as long as necessary, and will be willing to hold the acquired assets for a (very) long time.

Fiscal measures
The fiscal response differs across countries. The fiscal expansion and the credit guarantees are more extensive in Germany and France than in Spain and Italy, where the responses appear inadequate. Countries with weak fiscal positions have more to do, but are reluctant because of the risks associated with much higher debt levels. The absence of a strong, joined-up response at the eurozone/EU level is a constraint.

There are also big questions over the effectiveness of the intervention: ultimately the key issue is whether firms and households have access to credit or temporary income support, and are willing to use it.

All of this points to slower and incomplete recoveries, particularly in Southern Europe.

Will eurozone earnings keep pace with the US longer term?
I currently predict that corporate earnings in the eurozone will recover to pre-crisis levels by the end of 2021, which is a much quicker and fuller recovery than after the global financial crisis. This is a critical difference between the US and the eurozone: US earnings recovered quickly and are now 75% above the pre-crisis peak. In contrast, the weak EU/eurozone policy response could constrain the recovery, and lead to significant growth and earnings underperformance.

Will we have a second government bond crisis?
The economic crisis and the increased pressure on public finances has reignited the latent tension between eurozone members about common bond issuance and fiscal support. Countries have engaged in contentious and extensive debates over these issues. I believe the most likely outcome is a gradual process that sees the ECB and stronger European governments providing increasing support to the weaker ones. But the politics may continue to be ugly and the risk of a second European debt crisis is high. Even if government bonds continue to receive support from ECB intervention, the political uncertainty means a continued high risk premium on European assets.

Are the risks reflected in equity prices?
I don’t think the risks to recovery in growth and earnings are reflected in eurozone equity prices. Over the next six months, we will have extraordinarily poor earnings and GDP numbers, and I predict the recovery in the 12 months after that will be less than gratifying. In addition, we will have to deal with elevated political risk, which means sustained high risk premia. This outlook challenges the idea of a continued recovery in equity prices.


Paul Cavey

All may not be lost for China’s economy
Paul Cavey, Macro Strategist
Hong Kong

Published: 23 April 2020

China recently reported that its gross domestic product (GDP) shrank 6.8% year over year in the first quarter of 2020 – the first time in modern history that the nation’s economy has contracted. The contraction was sharper than our tracker had suggested, with the implication being that services (for which robust monthly data are not available) likely fared worse than other parts of China’s economy.

Headline: Bad, but expected
This outcome was largely intuitive and did not come as a surprise to markets in the wake of recent events. Indeed, it’s pretty clear that the COVID-19 outbreak delivered an unprecedented shock to China’s economy – one that hit the services sector harder than it did manufacturing.

On its own, I would have thought that such a poor headline GDP number would have been neutral for Chinese fiscal policy, in the sense that whatever the government did for the remainder of the year, it probably wouldn’t be able to regain the economic ground lost in the first quarter.

Silver lining in the details
However, the details behind the headline weren’t as grim as I had anticipated, offering hope that 2020 may not end up being a complete “write-off” for China’s economy after all:

  • Chinese industrial production (IP) and retail sales for March came in better than I expected. In fact, the IP data indicate that, by the end of March, output was already back to 95% of pre-COVID-19 levels (which I didn’t think would happen until late April). That makes it conceivable that IP could grow for 2020 as a whole.
  • The data suggest that China’s household sector hasn’t suffered as badly as the rest of its economy. The official unemployment rate improved from the relative spike in February, falling to 5.9%. And while first-quarter household income growth slumped to 0.5%, that was a smaller dip than in either consumption or nominal GDP.
  • Caveat: I’m not sure how telling these details really are in gauging the general state and direction of the Chinese economy. For example, it appears that small- and medium-sized employers overall have far from recovered yet, which raises the specter of further job losses going forward.

Glass half-full view
On the plus side, given that China can still seek to achieve some of its economic aims for this year (for example, growth in household incomes), I see the government’s recent data release as being slightly positive for risk assets. And the way the data were presented leaves me cautiously optimistic that 2020 may not yet be totally lost in terms of China’s economic development.


Jens Larsen

What might “back to work” look like for the European economy?
Jens Larsen, Macro Strategist
London

Published: 9 April 2020

Key takeaways

  • In Europe, lockdowns will likely start to ease gradually over the coming weeks, but will be different country to country.
  • Activity in a full lockdown week may be 1/3 lower than “normal”. I estimate that output across the eurozone could decline by 5% – 10% in 2020, with much bigger declines in earnings.
  • The countries/sectors that experience more extensive lockdown with greater exposure to travel, tourism and “social GDP” will see bigger declines and slower recoveries (Spain, Italy).
  • A large manufacturing sector is an advantage in the immediate recovery (favouring Germany, Switzerland, and to an extent Italy). Manufacturers/durable goods producers can respond more flexibly lockdown and activity should rebound sharply.

What is in the price?
The evolution of the epidemic, the authorities’ response and individual/firm behavior remains uncertain. Moreover, when the contraction is this large and the policy extensive, we cannot expect the usual relationship between growth and earnings to hold.

I believe valuations reflect a “normal” recession, rather than an extraordinary near-term output contraction with an incomplete recovery. Risks are to the downside until the full extent of the GDP and earnings reduction has become clear and macro uncertainty reduces.

Returning to (new) normal
Several countries have started talking about how to ease restrictions. Many have set up expert committee to define strategies and there may be some European co-ordination.

  • Austria and Denmark, which responded early and aggressively, may be first to start easing after Easter. The Austrian plan starts with opening small shops, then extending to large ones, followed by hotels and restaurants by mid-May.
  • Spain has extended the shutdown to 26 April but has promised to review some production restrictions.
  • Italy seems to be taking a more conservative approach and may not loosen restrictions for some time.

Implications for GDP
Despite the uncertainty, I have drawn some broad conclusions.

  • My analysis suggests that activity is about 1/3 lower than “normal”, translating to roughly 0.7% of annual GDP lost for each week of shutdown.
  • Global and European activity started to decline well before intense restrictions commenced, due to behavioral responses from firms and individuals.
  • The recovery will be slow and incomplete because governments will be cautious in lifting restrictions and both consumers and companies will also respond cautiously.
  • Manufacturing and construction restrictions will be eased before retail, with restaurants, travel and tourism last.

The broad picture is one of extensive restrictions for at least 6 – 8 weeks, followed possibly by months of reduced activity. These are only educated guesses, and the employment and activity indicators need to be watched closely, and interpreted cautiously.

GDP will decline significantly in the first half, then a sharp but incomplete rebound in Q3. in 2020 will likely contract by 7%. The range of GDP losses may be between 5% – 10%, with those countries with less restrictive lockdowns at the lower end and those with longer lasting and more extensive restrictions at the upper end. A slightly longer lockdown and a modestly slower return to a slightly lower level of GDP would shift the numbers significantly.

What about earnings?
Eurozone earnings in 2020 could be cut between 1/3 and 1/2 compared to last year. Earnings are always hard to forecast, but it is particularly tricky in this environment where we have a mix of unusually large swings in GDP and aggressive government intervention.

Dire consequences for the travel industry
The European travel and holiday sectors have already been hit hard by the shutdown and the effect is likely to extend well beyond the government-imposed restrictions. Consumers and firms will be looking to make up for lost income so will be reducing their normal holiday, and will be restricted in their travel activity, wary of going abroad. It is hard to argue for any resemblance of normality in these sectors this side of the summer holidays. The Mediterranean countries are likely to bear the brunt of the loss of this season.

Durables goods producers more resilient
Producers of durables can shift production over time, can produce to and sell from inventories, and can make effective use of their labour forces. These features usually make them very volatile, but they are helpful in the context of a sudden stop. These companies can make good use of furlough schemes. Moreover, demand for durables is less likely to be affected by behavioral change than some of the social activities in the service sector. To stimulate activity in goods production, governments might decide to provide further incentives, such as scrappage schemes.

For companies with strong balance sheets and cash balances, the rebound will likely be very strong. Germany and Switzerland stand out in Western Europe, while many Eastern European countries, which are tightly integrated into the manufacturing supply chains, will also benefit.


John Butler

Has the world changed permanently?
John Butler, Macro Strategist
London

Published: 8 April 2020

To be clear, no one can answer that question with any degree of certainty right now. There are still too many unknowns. But for my part, I have a hard time envisioning a scenario where the COVID-19 crisis does not leave an enduring imprint on the global landscape.

The global economy is reeling
By way of context, global growth is currently contracting at its fastest pace since the Great Depression hit in 1929. The range of potential outcomes is broad at this point, but I estimate that the economic fallout from the crisis has already shaved around 7% off global GDP, with more damage to come. Unemployment rates in most countries will likely rise by double digits as tens of millions of jobs are lost worldwide.

When might it turn for the better?
The timing of an upward turn in the economy will depend largely on the health care sector, particularly the race to find a COVID-19 vaccine, and the speed at which governments begin to soften and lift containment measures. At that point, of course, there will be a bounce in growth as the economy restarts, but it may be short-lived and probably won’t be sufficient to replace the lost economic output.

I expect a slow, weak recovery
Beyond the bounce, I think a V-shaped economic recovery is unlikely to materialise. Instead, I believe it will take years for the global economy to fully recover from this massive blow. The fiscal and monetary policy response has been swift, but the likely surge in unemployment suggests weaker trend growth going forward. Widespread job losses and income insecurity may require a protracted period in which companies and households rebuild their balance sheets and savings.

Fiscal policy is merely filling a hole
The fiscal policy measures announced by global governments to date amount to a little under 4% of global GDP. In my view, the measures taken thus far should be seen not so much as providing economic stimulus, but rather as necessary first steps towards helping fragile households and absorbing private-sector losses. In that sense, they are merely “filling a hole”, so to speak, and only partially at that.

The euro area is especially vulnerable
The European nations have delivered an uneven fiscal response to a common and tragic shock, from totally inadequate in Italy and Spain to closer to what is needed in Germany and Switzerland. Some countries will be able to cope with the burden of additional public-sector debt; others will not. How the euro area manages this crisis will determine the viability of the euro going forward.

This is more than a temporary shock
This crisis may well have lasting implications for economic, social and political preferences in the future. Structurally, I believe the world is likely to look different in many ways on the other side of it, including:

  • Income inequality may widen, while income insecurity will likely have increased. Historically, both forces have tended to boost support for more populist politics. I expect that trend to gain traction.
  • I foresee a shift towards bigger government and more centralised control. The social value of certain sectors may be recognised more explicitly — for example, through permanently higher government spending on health care.
  • I think public-sector debt ratios will be 15% – 25% higher coming out of this crisis, yet the populace may have a greater tolerance for government spending projects, more generous social safety nets and larger fiscal deficits.
  • My long-term “deglobalisation” theme will likely accelerate from here, aided by continued deterioration in the already fractured relationship between the US and China.
  • For now, the focus should be on avoiding global deflation. Over the medium term, however, I believe deflationary fears will give way to a growing acceptance of inflation.

Bottom line: The world is not ending, but it may indeed be a changed place in the wake of COVID-19.


Jens Larsen

Can the eurozone crisis response prevent a longer-lasting crisis?
Jens Larsen, Macro Strategist
London

Published: 7 April 2020

Key points

  • The eurozone crisis response is likely enough to prevent the COVID-19 crisis from morphing into a government bond crisis, but the resources and facilities of the European Stability Mechanism (ESM) require further strengthening.
  • The crisis has created lasting political scars, and higher debt levels may constrain the recovery.
  • To gain conviction on a eurozone recovery and eurozone risk assets, I need more clarity on the health crisis and more confidence in the adequacy of the fiscal response.

What does the policy response look like?
COVID-19 may be a symmetric shock in the sense that it hits all countries, but it is asymmetric in its intensity and in individual countries’ capacity to respond. In the eurozone, Italy and Spain currently look particularly hard hit. Their limited fiscal capacity may mean a more tepid policy response that prolongs the crisis.

Apart from the ECB, the joint response of the eurozone/EU has, so far, been poor, lacking in co-ordination, size and urgency. Although the response is improving, there is significant political damage to be dealt with over the coming years.

There will be further attempts to strengthen the EU’s response in the near term and chart a more productive future course. There is a high chance of an agreement that entails:

  • Allowing countries to access the ESM with few conditions.
  • A joint financing scheme for temporary unemployment.
  • Several smaller fiscal/financial initiatives.

In addition to warm words about better collaboration, I expect EU leaders to map out areas where there can be more future financial support. If they are willing, this could be presented as a relative success and a stepping-stone for doing better. But the politicians and the political incentives are hard to judge.

Why does this matter for investors now?
The ability to respond jointly to this crisis is critical to sustain the eurozone and to avoid a repeat of the sovereign bond crisis.

  • Can the ECB’s aggressive purchase programme keep government bond spreads in check and avoid a financial and government bond crisis? I think the answer is yes.
  • Medium term, the fiscally weakest governments – most obviously Italy – may need to rely on the ESM for additional funding. For that to work, Italy needs to be willing to ask for support, and the other eurozone governments need to be willing to grant it on a large scale and with few conditions. This will be politically contentious, but I believe it is financially and politically feasible. This week, they should take the first step.
  • Long term, will there be continued support for the EU/euro project? The crisis has likely eroded popular support, and weak recovery will strengthen that trend. But there are no good alternatives. It would be a brave leader who decides to compound a fiscal crisis with a sovereign debt and financial crisis.

What does this mean for eurozone risk assets?
At this point, I remain cautious. Valuations may seem “attractive”, but I still lack a clear sense of when the lockdowns will end and how we will return to “normal”. This makes it hard to judge how large and prolonged the hits to activity and earnings will be.

Our analysis suggests that the immediate downturn is very deep and that the jump in unemployment – even if temporary – is large. If the recovery is slow, the risks to government and private-sector balance sheets will intensify and the political fallout will be harder to handle.

Even with my relatively constructive take, there are some big hurdles to navigate in the next few weeks. I think caution is justified until this fundamental uncertainty recedes.


Jens Larsen

Update on ECB actions
Jens Larsen, Macro Strategist
London

Published: 27 March 2020

Key takeaways

  • The ECB has shed most of the remaining constraints on purchases. It will be able to support an aggressive expansion of sovereign issuance this year.
  • The eurozone’s fiscal response lags behind, but will catch up over the coming weeks as growth deteriorates.
  • Eurozone political leaders will likely eventually endorse using the European Stability Mechanism (ESM), but I think will need to go further.

ECB’s pandemic emergency measures
The ECB has published details of its €750 billion Pandemic Emergency Purchase Programme (PEPP).

When the decision was made last week, the ECB stressed the flexibility of its implementation. This decision is the practical implementation of that:

  • Greece is included in the programme.
  • The 33% limit on the share of eurozone members’ bonds that the ECB will hold under its existing programmes does not apply to the PEPP.
  • The ECB can buy across the yield curve, from very short maturities (down to 70 days) to very long ones.
  • The ECB has accepted pari-passu treatment in the event of a sovereign-debt restructuring.

Few constraints remain
The last three points were news, I believe, and demonstrate that the ECB will disregard past constraints in order to respond to the pandemic. The remaining constraint is that the purchase amounts are guided by the ECB’s capital key, which, in turn, reflects the size of the economies, rather than the size of the debt market or the current needs. That said, the ECB can temporarily deviate from that key and lean into specific markets if necessary.

Programme can scale up if necessary
With purchases of more than €1 trillion (>8.5% of GDP) before year end, the ECB has given assurance to the market that the sharp rise in debt issuance that we will see in the coming months will be absorbed. I think that is an important assurance that will keep sovereign spreads in check.

Challenging debt position of many European governments remains
Many European sovereigns should see sharp rises in issuance and in debt-to-GDP as a result of this crisis. Italy has particularly challenging dynamics, but it is not alone. I think the ECB will end up holding much of that increase on its balance sheet, in all likelihood for a long time. By the end of the year, the ECB could likely hold more than 30% of GDP in its asset purchase programmes. There is no reason why it should stop there.

ECB more aggressive than political leaders
Heads of government have so far failed to reach an agreement on how to approach the challenges facing the fiscally most vulnerable countries (as of 27 March 2020). I expect that they will eventually agree to use the ESM to support EU governments, whereby individual governments can draw up to 2% of GDP on credit lines with light conditionality. Any country can apply, but it is done on an individual basis, so it will still be debt. I don’t think EU leaders are ready to contemplate a ‘joint debt instrument’ that goes beyond the use of the ESM. Although such a solution would provide a helpful backstop, it would be politically challenging for many countries.

Support required beyond Italy
If a broad range of countries draw on the ESM for funding at low rates, that would effectively establish a practice of near-joint issuance of debt. All eurozone countries would be on the hook for much of this increase in debt, either via the ESM or, ultimately, via the ECB. That, I think, is the practical reality. The politics need to catch up.

Does this go far enough?
Speaking only for myself, I think it does, for now. The ECB can act aggressively in the interest of the eurozone as a whole — that is what its mandate says. It is not surprising that the eurozone’s political leaders are focused on their own national crisis, and that they struggle with decisions that have deep political and fiscal implications.

The German and Dutch (and other) governments are not willing to give grants on a large scale. Imagine the politics of handing over hundreds of billions of euros to another rich country at a point of economic crisis. I think they will ultimately be willing to lend their credit and accept that the ECB acts as a backstop, but they are not there yet.

This supports eurozone fiscal response
In comparison to the US, the discretionary increase in fiscal spending may look less impressive so far. But in the eurozone, the automatic stabilisers — the rise in spending that comes about when revenues fall and unemployment rises — are much bigger, particularly when the GDP decline is big. The ECB’s decisions and the ESM measures should ultimately buy some room for this fiscal response.


Mike Medeiros

US fiscal package helpful, but not a panacea
Michael Medeiros, CFA, Macro Strategist
Boston

Published: 19 March 2020

I think Congress will pass a large piece of fiscal legislation over the next month or so in response to the coronavirus fallout. Subsequent legislation is also possible, depending on the duration of the economic downturn. Given the ideological differences between Democrats and Republicans (and within the parties themselves), the legislative process could easily fail once or twice before ultimate enactment. Any legislation will need to be bipartisan enough to garner the 60 necessary votes in the Senate.

That said, I think Congress will pass something relatively soon, perhaps as early as this week, with an initial size of between 3% – 5% of GDP. (Risks are skewed toward more.) The speed with which equity markets have declined, especially over the past week, has sharpened the urgency within both the Trump administration and Congress. Going forward, Congress can and likely will do more, but perhaps only if markets and the economy weaken further. I expect legislators to continue to be reactive, not proactive.

It’s all about the details
The details of the legislation will matter. Republicans are coalescing around a plan that would include three buckets: tax cuts/cash payments to individuals, small-business lending facilities, and industry support (notably for airlines). Democrats could support individual assistance (as long as it’s means-tested) and small-business lending support, but they’re also pushing for public health infrastructure (e.g., hospitals, supplies), expanded unemployment insurance, and some loan forbearance measures.

The industry-specific support, starting with airlines could be a sticking point. If Democrats go along with it, they may push to add restrictions such as those suggested by Elizabeth Warren, which include worker and consumer protections, as well as minimum wage stipulations and share buyback limits. It’s not clear if Republicans would agree to such restrictions, and I think the bar for industry bailouts is much higher today than in 2008 – 2009. However, if the two parties find common ground on this, it would open the door to supporting other industries too (not just airlines).

Right now, here’s my sense of what is being proposed, including the upper end, in terms of cost, that could be agreed upon by both sides initially:

  1. Individual support (US$500 bn)
    • Some combination of tax rebates and individual checks (mailed in two tranches)
    • Democrats likely to push for, and secure, means-testing for both rebates and checks
  2. Automatic stabilizers ($200 bn)
    • Expanded unemployment insurance and Medicaid funding to states
    • Republicans likely to push back on some spending, but Senate Democrats have leverage
  3. Small business (US$250 bn)
    • Small Business Administration (SBA) emergency lending
    • Creation of a new small-business lending facility
  4. Industry-specific support (US$50 bn – US$200 bn)
    • US$50 bn to airlines, if stipulations and conditions can be agreed upon
    • Could lead to support for other negatively impacted sectors
    • Of course, if the public health system gets overrun, then bailouts and the federal debt burden would grow materially.
  5. Public health/other (US$400 bn)
    • Public health funding to states
    • Federal mortgage loan forbearance
    • Student loan agreement modifications

Medium-term implications
While the proposed fiscal package is substantial and could even grow, so far it appears to be a combination of automatic stabilizers and temporary income assistance. Helpful? Of course, especially if Republicans agree to public health investments, but likely not a “cure-all.” That would require science and a more significant investment in public health infrastructure to attack the underlying nature of the crisis. More cash won’t make people go out and spend until the health threat subsides meaningfully.

In the medium term, the proposed bill would also worsen what is already a deteriorating public-debt backdrop. Federal debt as a percentage of GDP is already the highest since World War II. If we assume the pending fiscal package in the context of a recession, that figure would approach 150% of GDP over the next decade. Without any medium-term restraints on entitlement spending, this could have major implications for the fiscal premium in long bonds. It seems the market is already sniffing that out, despite the still historically low level of yields. In conjunction with recent Fed actions, Modern Monetary Theory type policy could be taking hold, without policymakers specifically calling it that.

Bottom line
Congress should eventually enact a fiscal package worth at least 3% – 5% of GDP, but one geared toward automatic stabilizers and one-time consumer assistance. A panacea it is not. And the fiscal easing would come in the context of a rapidly worsening federal debt trajectory, with potentially big implications for longer-dated Treasuries.


John Butler

The ECB acts – now it’s up to governments
John Butler, Macro Strategist
London

Published: 19 March 2020

The ECB has taken much-needed action, targeting yields and spreads and providing full monetary financing of “whatever it costs” to address the coronavirus crisis. Now European governments need to deliver an appropriate fiscal response.

Late last night, the ECB announced an additional asset purchase programme:

  • It includes €750 billion of extra purchases.
  • This will run at least until the end of the year but potentially beyond if the coronavirus crisis persists.
  • Although over the duration it will adhere to the capital key (which reflects each country’s share of the EU’s population and GDP), the ECB can front load or deviate from the key for a particular country for a period of time.
  • The purchases will include Greek assets.
  • It will widen the eligible assets under the corporate-sector purchase programme to include non-financial commercial paper.
  • The ECB will consider dropping the 33% issuer limit.
  • And the ECB stands ready to expand the programme further.

This is clearly a move in the right direction, in my opinion, fundamentally changing the message from the ECB’s previous press conference. It is prepared to finance the cost of tackling the crisis and is now targeting yields and spreads, which need to compress hard. The additional asset purchases for this year amount to €870 billion. Together with the existing programme, it will buy €1.05 billion of assets in the remainder of 2020. This is the fastest monthly pace of purchases the ECB has ever done, equivalent to 7.3% of GDP. The ECB can target a sovereign spread and is considering dropping its self-imposed limit on purchases of an individual issuer.

These are helpful and necessary steps. But now the fiscal authorities need to use the space created by the ECB. This shock is about permanent losses in income. Unless the fiscal authorities can make those losses good, there will be a sharp spike higher in unemployment, protracted weak demand and a period in which households and corporates need to rebuild their balance sheets. This monetary response alone will not prevent a deep and long economic hit. The euro area fiscal response has to be on an appropriate scale, not the 1% on average of fiscal loosening currently announced. We await the next step.


John Butler

ECB response to COVID-19 underwhelming
John Butler, Macro Strategist
London

Published: 17 March 2020

On March 12, the European Central Bank (ECB) announced a disappointing package of measures in response to the COVID-19 outbreak. Despite noting a “considerable worsening in the outlook”, the ECB just doesn’t have the tools to resolve or offset this crisis.

Some of the fundamental assumptions that have underpinned asset prices are myths, including the central bank “put” and the ECB president stating that it “will do whatever it takes”.

In its March 12 statement, the ECB said, “Governments and all other policy institutions are called upon to take timely and targeted actions to address the public health challenge” and ECB President Christine Lagarde said, “We are not here to close spreads”.

This response is in stark contrast with the appearance of coordinated action in the UK. The Bank of England surprised markets on March 11 with an intra-meeting announcement of a series of actions, the same day the UK government committed itself to substantial and sustained fiscal loosening in its latest Budget.

Measures
The ECB expanded its asset purchase programme by €120 billion (€13 billion a month) until year end, skewed to corporates; announced more and generous liquidity facilities for SMEs; and eased the capital and liquidity buffer for banks. It decided not to cut interest rates.

The ECB cannot offset the economic shock ahead. That requires fiscal and health care responses. However, the message the ECB sent was:

  1. The ECB is prepared to underwhelm market expectations — either because of its new membership or because it just doesn’t have the tools.
  2. The ECB views this as temporary. The long-term refinancing operation is temporary and quantitative easing (QE) will extend until year end, so the ECB has reverted to making additional QE time dependent rather than state dependent.
  3. The ECB is irrelevant. It can’t cut rates. The additional QE is only €10 – €13 billion a month, whereas the market assumed it would be €20 billion.

There is a high probability we will soon be exploring the tail risks for the euro area.

We know this shock isn’t about rate cuts, QE and liquidity. Italy could be squeezed out of the markets over the coming days and weeks. The issue then becomes whether neighbouring countries are willing to share risks, or not, unconditionally. This could be the moment when the eurozone needs to answer this question, which has been left unanswered since the start.

The way the region has responded to the question to date is by setting up an infrastructure that forces a neighbour to adhere strictly to a programme (European Stability Mechanism), which will be monitored. For a democratic country, that will feel like punishment. And this is the type of shock where terms and conditions that feel like punishment could backfire.

We are a giant step closer to understanding that former ECB President Mario Draghi’s promise that the “ECB will do whatever it takes” was a myth that provided a powerful blanket over the region for eight years. Ultimately, it is a political decision. Yet no one can be confident about how politicians will answer that question because they themselves don’t appear to know. And, relative to 10 years ago, Europe’s politicians appear weaker and more divided.

The COVID-19 crisis could result in each country exposing its voter base to the liabilities of its neighbours. The coronavirus outbreak might then go down in history as the external shock that made the euro sustainable. Alternatively, it could result in national governments protecting and insulating their nations, which could ultimately fragment the single currency.

Closing thoughts
Once the market downgrades the value of the ECB’s shield, it will find a way of asking the question. Experience has shown that politicians only give an answer when the eurozone is dangling on the edge, not pre-emptively. We may be close to having to price in that question.


Eoin O’Callaghan

How does a global recession turn into a financial crisis?
Eoin O’Callaghan, Macro Strategist
London

Published: 9 March 2020

A coronavirus-driven global recession now looks likely. The longer the shock lasts, the bigger the risk it spills over into market stress given the high level of debt in the system and low level of global liquidity growth going into this shock. This is a critical risk we are monitoring along several dimensions:

  • Global liquidity – There is a risk that the hit from coronavirus could turn into a global liquidity shock, compounding the drag on growth. Going into the coronavirus shock, global liquidity growth was close to 30-year lows. Both central bank liquidity (monetary base + FX reserves) and deposit liquidity (M2) were starting to improve at the turn of this year but remained very low by historical standards.
  • Funding stress – Some measures of stress have started to widen over the past few days. For example, the FRA-OIS spread (difference between 3-month Libor and the Overnight Indexed Swap rate) was up to 40 bps as of this writing, the levels we saw last year before the Fed stepped in. But that is still only just over half the peaks we saw in 2012 (70 bps) and a fraction of the levels (140 bps) we saw during the global financial crisis.
  • Global FX reserve growth – Global FX reserves could be particularly vulnerable to a significant slowdown. Weaker commodity prices, a faster contraction in global trade, and a stronger dollar would all put downward pressure on global liquidity. Recent weakness in the US dollar could be a positive development in that regard if it can continue, especially if it leads to stronger commodity prices. And if developed market central banks start to reaccelerate asset purchases/inject liquidity, it could provide a further offset. But I believe the risk is skewed toward a significant fall in FX reserves.

John Butler

Central bank action
John Butler, Macro Strategist, Team Leader
London

Published: 5 March 2020

What did we learn following the recent central bank action? If we didn’t already know it, central banks can’t save the day. Yes, the Fed and probably other central banks will always respond to sharp declines in equities. But…

  • The central bank put is worth less. This isn’t a shock where more stimulus generates earnings or nominal growth. I think we are a large step closer to understanding the central bank put. That “put” is now about keeping the system together and liquid rather than generating and nurturing nominal growth. That is critical. However, its potency is likely to be much lower and events are likely to overwhelm and mean its ability to boost confidence expires quickly.
  • The statement from the G7 was a coordinated message of uncoordinated action. Other central banks will follow the Fed, but the tools used will vary and become more complicated and targeted. Similarly, looser fiscal will come but it’ll likely be uncoordinated, country-by-country and targeted at stabilisation — replacing lost income and debt servicing — rather than incentivising spending or investment.

Monetary and fiscal policy will potentially become potent again but only if the case count globally quickly stabilises, there is a medical breakthrough, and/or the world learns to live with the higher virus risk. It feels like we are still some way from that.

Instead, what’s ahead is a hit to global growth and earnings that is likely to be harder and longer lasting. Global growth will contract. And the longer and deeper the shock, the more the market will need to assign a bigger probability that this becomes a risk to financial stability and undermines the ability to service debt at a time when the level of debt in the global system is at record highs. We need to have some confidence we know what the floor looks like before we can start thinking about the sky. We are still in downside discovery mode.


Paul Cavey

The impact on China and its neighbors
Paul Cavey, Macro Strategist
Hong Kong

Published: 5 March 2020

Looking at the latest purchasing managers’ index (PMI) data, it is now clear that the economic impact of the virus on China is immense. We’ve never seen anything quite like this, even during the global financial crisis (GFC). Essentially, China’s economy came to a sudden stop during the course of February, and that meant that official PMIs were down under 30, which we’ve never seen before. That said, there are some signs that the economy is beginning to normalize and turn around. The recovery remains very slow, but it does look like the worst is over and the economy should be recovering to perhaps 85% in the next couple of months or so.

Now the focus begins to shift to neighboring economies around China, and foremost among them is Hong Kong. There had been signs of stabilization in Hong Kong following the protests, but the virus has now delivered a second blow. Other countries we’re watching include Taiwan, Korea, and Japan, which can be affected by the manufacturing cycle and disruptions in supply chains — all of which we’re seeing evidence of in PMI data. Tourism inflows are also being affected, particularly in Japan and Korea. Governments in those countries are taking the outbreak very seriously, which will depress domestic services activity.

Looking ahead, the PMI data in China suggests that producers are actually quite optimistic about the next 12 months. In fact, the 12-month indicator rose to the fastest level in the last five years. On the other hand, if you look at Taiwan, the 12-month indicator fell quite sharply, to depths we haven’t seen since 2015. What all this suggests is that the impact of the virus in China has been extremely sharp, but it’s probably going to be quite short. In economies like Taiwan’s and Korea’s, the impact may not be as sharp, but it may be more prolonged. So the focus in coming weeks and months will shift from China to the neighboring countries.


Juhi Dhawan

The US economic impact
Juhi Dhawan, PhD, Macro Strategist
Boston

Published: 5 March 2020

Studies suggest that a mild pandemic could take about 1% off US growth (“mild” is defined as infecting 25% of the population with fatalities of 100,000). Roughly 60% of the output lost during a pandemic is due to prevention measures, like the lockdowns and travel bans we are seeing worldwide. In terms of sectors, leisure, entertainment, and transport have been hardest hit during pandemics. Health care is the one area that has gained. Areas like professional services, finance, and government tend to hold steady. This means that roughly 7.5% of GDP and 15% of employment are at risk on the service side (ancillary industries such as retail and wholesale also feel the pain). This is in addition to the beleaguered manufacturing sector (11% of output and 8.5% of employment), where hours have already been cut to the bone and layoffs are likely to pick up.

I expect the drop-off in US activity to gather pace in March and April and then taper off by June. The recent improvement in China suggests better export/import outcomes starting later in the second quarter. On the other hand, leisure and entertainment could be negatively impacted through the third quarter, with the outcome really a function of the evolution of the virus in the US and any progress on treatments and vaccines. For now, I am assuming that there is some attenuation by June but still a tepid turn after. Profits would follow a similar trajectory — down in the middle of the year but better by year end. Dollar funding for companies could be an issue on a cross-border basis as there will be many missed payments in the supply chains due to disruption. This can cause disruptions in the economy and financial markets.

US and global policy response to this virus could represent an important shift for the global economy. The policies that are likely to be most immediately effective in this situation are credit easing, forbearance, and liquidity extension. The key is to keep businesses from laying off workers due to the fall-off in demand/supply, which will eventually recover. Government spending comes next on the priority list, to help rebuild confidence in the economy and put dollars to work if the private sector is reluctant or unable to do so. Last is monetary policy, which works with a lag but can help with liquidity and the functioning of credit markets, while also, in the case of the US, giving more space to the rest of the world to ease. The election-year calculus muddies the fiscal stimulus picture in the US. However, if the situation deteriorates, both parties will push hard to help the consumer and displaced workers, as no one will want to go into the election as the party that did not help voters.

The upside case? The consumer has been the bedrock of this expansion and lower energy prices and low interest rates will absolutely help. If we can institute some policies of forbearance, the ride over the next few months will become smoother. The “containment period” would then be equivalent to a precautionary rise in the savings rate, which would be unwound when conditions improve. While the near term is cloudy, the rebound, when it comes, could be powerful. Inventory levels will be severely depleted, central banks are sitting on negative real rates, and fiscal stimulus in China could give the global economy a jump-start in 2021.


Jens Larsen

The euro-area impact
Jens Larsen, PhD, Macro Strategist
London

Published: 5 March 2020

My focus here is on the euro area, and on assessing the economic and financial mechanisms that might turn this into a longer-lasting recession and financial crisis.

My key points:

  • The key risk is that the supply side suffers long-lasting damage through supply-chain disruption, extended job losses/financial failures, and a credit crunch.
  • The euro-area financial system has capital capacity to absorb losses and plenty of liquidity — but banks may decide to contract the balance sheet anyway.
  • The economic and financial policy response should focus on preventing a credit crunch and avoiding unnecessary job losses/bankruptcies through a flexible use of government balance sheets. Lower interest rates and tax cuts won’t make much of a difference.

Going forward, I am looking for indications of distress in the corporate sector, but also indicators of banks starting to limit access to credit and aggressively protecting their balance sheets. What about policy? I would argue that conventional monetary and demand management policies (for instance, tax cuts) have a limited role to play here. I am looking for measures to support liquidity and fund the corporate and financial sectors, and measures to provide targeted (and temporary) fiscal support.

I am mildly encouraged by the early signs that the euro-area governments might provide temporary relief to the private sector — Italy announced a small program that isn’t transformative but is a sign of thinking along the right lines. The right response here is to allow automatic fiscal stabilisers to work, intervene to support corporates at risk, and refrain from calling for fiscal consolidation.


Thomas Mucha

Geopolitical pressure points
Thomas Mucha, Geopolitical Strategist
Boston

Published: 5 March 2020

Two quick points here:

US-China relations: As you’ve all heard me say for a long time, the US-China relationship is in structural decline and is now centered on “great power” competition — an increasingly hawkish posture that is today bipartisan and, importantly for the long term, institutionalized in the new US national security strategy. Official Washington has turned a corner on China, and this more competitive framework is driving almost all national security policy conversations, including the response to COVID-19.

Among my national security contacts, the consensus view is that US-China relations are about to get worse as a result of the virus. There’s also a growing consensus that COVID-19 is likely to accelerate economic and trade decoupling between the US and China, particularly in sectors critical to national security (the usual suspects: tech- and defense-procurement supply chains, biotech, pharmaceuticals, etc.). So, the deglobalization theme remains a key focus.

Spread of virus to ill-prepared countries: This remains the bigger immediate geopolitical risk, given the high levels of domestic political instability and dysfunction we’re seeing globally right now and in recent months (Syria/Turkey/Russia, Iran, North Korea, Lebanon, Hong Kong, Chile, Venezuela, and on and on). The national security concerns here are straightforward: Will the virus spread uncontrollably to countries that can’t handle it due to conflict, weak institutions, poor health infrastructure, etc., and overwhelm a government’s capacity to manage a widespread outbreak? Iran is the poster child of this concern right now, given its poor official handling of the crisis so far, with North Korea another potential problem area.

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Multi-asset views

Matt Bullock

Three lessons for yield-starved investors
Matt Bullock, Investment Director
London

Published: 28 April 2020

Income is getting increasingly difficult to come by these days. Amid the severe market downturn in March, global central banks aggressively cut interest rates in an effort to lessen the damage. Meanwhile, as many large corporations effectively ceased to operate, stock dividends began to collapse.

Although the headlines focused mainly on the immediate impact of these developments, investors who rely on the equity and fixed income markets to generate regular income in the form of dividends and/or bond yields — from insurance companies to pensioners and endowment funds — will, unfortunately, likely feel the impact of this unprecedented crisis for years to come.

The crisis has also shone a bright spotlight on various strategies, across asset classes, that pay out regular income to investors, particularly the manner in which many of these strategies have been generating their income distributions. There are some important takeaways here, in my view.

Above all, we must always consider the sensitivities of investors who buy into income-producing strategies. There will be exceptions of course, but, generally speaking, one would expect investors who require a strategy that pays regular income to assume a certain level of conservatism on the part of that strategy and its managers.

That hasn’t always been the case, however. For years, many such strategies have been paying out distributions from a combination of “natural” income and capital gains. But as capital gains have turned to losses and dividend yields have been slashed in today’s brutal environment (both likely to continue), income-paying strategies have been shaken to the core.

Already in the United Kingdom, for example, we’ve seen the Investment Association suspend the equity-income yield requirements for at least 12 months (could be longer, in my view) due to widely anticipated dividend cuts going forward. I’d expect other markets to follow suit in the period ahead.

So, what lessons can investors who need income strategies draw from all this?

  1. Transparency: There is nothing wrong with buying a strategy that pays distributions from both income and capital gains, but investors need to understand the potentially negative implications of that combination when markets decline sharply.
  2. Suitability: Asset managers must always remember who it is that we are investing for (i.e., our clients) and what the most important objective of the strategy is (i.e., typically, dependable income).
  3. Realism: We must be realistic and recognise that there is only so much income that can be generated. In markets like today’s, we may have to accept the sobering reality of lower income — perhaps meaningfully lower — at least for the time being.

John Parsons

Update on currencies – Euro and US dollar uncertainties
John Parsons, Currency Portfolio Manager
London

Published: 31 March 2020

What would Winston Churchill say today?
It would be interesting to hear Churchill’s thoughts on the current crisis. Sadly, we will never know, but we do know he didn’t think much of currency traders:
“There is no sphere of human thought in which it is easier for a man to show superficial cleverness and the appearance of superior wisdom than in discussing questions of currency and exchange.”

With those stinging words ringing in my ears, here are my thoughts on currencies in the current environment.

The euro faces existential threat
I think the euro will face an existential moment in the coming weeks. That can be avoided if the eurozone countries move to risk-sharing and towards a full fiscal transfer mechanism. Since adopting the single currency, Italy has hugely underperformed (30% below the average level of GDP of other member states, as we enter this crisis) and has suffered high social costs as a result.

Today, my view is that Italy does not just need a credit line or a central bank buying its debt, nor does it need conditionality – it needs a cash transfer. At the end of this year, I anticipate the real GDP growth in Italy going back to 1995 may be close to zero and unemployment could be above 15%. I don't think any loans will change that and the eurozone will very soon need to make a decision on this.

US dollar uncertainty
The dollar has rallied strongly recently, benefitting from its reserve-currency status and a scramble for dollar liquidity. With the help of the US Federal Reserve, that has begun to fade. I think the dollar will now be judged on public health policy and fiscal policy over the next few months. Both fronts entail uncertainty and risk.

Given there is so much we do not know, the future for the dollar is unclear, with many unanswered questions.

  • What will the US-China relationship look like in five years?
  • What does the end of independent central banking and the potential introduction of ‘Modern Monetary Theory’1 do to the world’s reserve currency?
  • Will the euro survive?
  • Will China emerge from the crisis stronger relative to the US?

New crisis, new rules
We do know that the world has changed this quarter, in ways no one could have imagined. Applying old rules now can be very dangerous. Two of the great promises made by policymakers after the 2008 crisis were “we will improve income inequality and reduce the levels of debt in the system as a proportion of GDP”. They failed on both counts and many societies will not now accept the same solutions to this crisis.

In most jurisdictions, the worker, shareholder and governance relationships will likely change dramatically. I anticipate societies will demand a different set of priorities, starting with public health, against a backdrop of deglobalisation and more volatile geopolitics.

A different Churchill line would now seem to apply to investment decision making: “Thought arising from a factual experience may be a bridle or a spur”.

1A theory that describes currency as a government monopoly and asserts that unemployment is evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.


Matt Bullock

The importance of staying invested
Matt Bullock, Investment Director
London

Published: 26 March 2020

At times like this, it never hurts to dust off basic, time-tested principles — like the importance of staying invested through thick and thin — that even sophisticated investors may lose sight of when fear takes hold. While we don’t yet know how long the COVID-19 crisis will last, the extent of its economic impact, or when markets will bounce back, here’s what we do know.

  • Investor returns would have suffered greatly from missing the market’s best days. The MSCI World Index1 returned 7.52% annualized for the 15 years ended December 2019, but investors who missed the 10 best days from that period would have earned less than half of the market’s return. And missing the 40 top-performing days would have resulted in a loss of 2.51% (Figure 1)!
  • Trying to “time” the market is difficult, if not impossible. Of those 40 top-performing days, more than half (22) occurred in 2008 and 2009, around the time of the global financial crisis. So, ironically, I suspect many panicked investors who sold equities during that period, in an ill-advised effort to avoid the market’s worst days, may have missed some of its best days.
  • The best approach may be to simply stay the course. The market will eventually recover from the current crisis, and when it does, it's beneficial to be positioned to participate in the upswing. That’s why I think it is important to keep emotions in check and adhere to a disciplined, long-term investment strategy, painful though that might be in the short run.

FIGURE 1
Missing the best days in the MSCI World Index

1The MSCI World Index is a widely used proxy for global equity markets.


Scott Elliott

The beginning of the bottoming process?
Scott Elliott, Portfolio Manager, Multi-asset inflation hedges
Boston

Published: 5 March 2020

There will be a tremendous amount of stimulus (lower rates, lower oil prices, more fiscal stimulus) and a release of pent-up demand coming out of this slowdown, which I forecast should be over by May. It will be put into a global economy that was already functioning near full capacity when everyone gets back to work.

Market participants were pretty long heading into this downturn, which has accentuated the selling. But I’m guessing this has now been largely adjusted given the volume of selling. As one of my colleagues used to say, “Bottoms are processes not events.” This one is a perfect candidate. I think the bottoming process has now started. Two weeks ago, the market was only focused on China, while scientists were warning of a global epidemic. Now the financial consensus is more aligned with the scientific consensus. A recession is now in global financial prices. Sure, we could decline more, but odds have now become asymmetric, favoring the upside on a 6 – 12 month time horizon, even assuming a contraction that lasts through May.

The news over the next several weeks will be very bad indeed. But you don’t get good prices and good news on the same day, and we are finally beginning to get good prices. The time to panic is over, a temporary global shutdown is being discounted, and we should now be focused on the patient accumulation of attractively priced long-term assets.

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Fixed Income views

Nanette Abuhoff Jacobson

The Fed’s credit-purchase programs are a game changer
Nanette Abuhoff Jacobson, Global Investment and Multi-Asset Strategist
Boston

Published: 6 May 2020

As detailed in a “Fed series” penned by my colleagues Amar Reganti and Caroline Casavant — most recently, Corporate credit and monetary financing: A new era in Fed policy — the US Federal Reserve (Fed) has adopted a “whatever it takes” stance to support the ailing US economy amid the ongoing COVID-19 crisis. In broad terms, the extraordinary steps taken by the Fed over the past several weeks include (but are not limited to):

  • Conventional monetary easing (i.e., cutting interest rates to the zero lower bound);
  • Regulatory guidance designed to encourage banks to continue lending; and
  • Large-scale asset purchases, both on and off the Fed’s balance sheet.

While many of the tools the Fed has unveiled harken back to ones used during the global financial crisis, its off-balance sheet purchases go well beyond anything done then, providing up to US$2.3 trillion of liquidity to corporate-bond, asset-backed security, and municipal-bond issuers.

In addition, while not yet implemented, the newly created Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) are US$500 billion and US$250 billion programs, respectively. They allow the Fed to purchase short-dated maturities with investment-grade ratings as of 22 March 2020 and ratings of at least BB- on the purchase date.

I see three important implications of these two programs for credit markets:

  • They effectively eliminate the tail risk of companies downgraded to below-investment-grade status — so-called “fallen angels” — not gaining access to financing and thereby risking debt default and/or bankruptcy.
  • The Fed has become an enormous buyer of credit. The US$750 billion of buying power represents 42% of the outstanding universe of five-year or “under-maturity” nonbank, investment-grade corporates (Figure 1). Even if the Fed buys only a fraction of that, it sends a strong signal to the market, which should adjust accordingly.
  • The support of lower-grade credit is likely to have positive liquidity and spread-tightening spillover effects on the entire investment-grade bond market, of which around 50% is rated BBB as of this writing.

FIGURE 1
Potential Fed purchases through the PMCCF and SMCCF are important backstops for credit

Bottom line: I believe the Fed’s unprecedented recent actions may well have avoided a Great Depression-type scenario in which market liquidity would have all but vanished.

Investment takeaways

  • I believe investors should consider following the Fed’s lead as a buyer of credit. While credit spreads have tightened since the programs were announced, they are still quite wide by historical standards. I continue to view investment-grade and higher-quality high yield as among the best values in today’s markets.
  • A caveat: The Fed isn’t buying all credit. While most forms of credit should indirectly benefit from Fed purchases, it should be noted that lower-quality high yield does not directly benefit under these particular programs, nor do bank loans or lower-quality structured credit. However, the Fed could take further steps to expand the size or scope of its announced facilities.

Chris Jones

Credit disruption creates opportunity in high yield
Chris Jones, CFA, Fixed Income Portfolio Manager
Boston

Published: 27 March 2020

While obviously a challenging market environment, we believe that high-yield bond and bank-loan spreads, in the 97th and 98th percentiles, respectively (as of this writing), could more than compensate investors for forward-looking potential credit losses.1

  • In the case of bank loans, an average market price of around 782 implies that investors are expecting more than 50% of the market to default. However, the worst five-year cumulative default rate for loans historically has been 25.3%.3
  • Additionally, investing in high yield at spreads over 1,000 basis points (bps) and then staying invested for three or more years has historically produced annualized total returns of at least 14%.4
  • As a result, despite today’s challenges, we believe there may be compelling long-term value in the high-yield and bank-loan markets.

As of March 25, the high-yield and bank-loan indices were down between 9% and 11% over the past week and between 17% and 18% on a month-to-date basis. Month to date, high-yield and bank-loan spreads had widened by over 500 bps, with the commodity-sensitive sectors widening the most. The average bank-loan price was 78, while the option-adjusted spreads of the global and US high-yield indices were both over 1,000 bps. European high-yield spreads were a bit lower (799 bps), due primarily to a lower energy-sector weight versus global and US high yield. 5

Given that bid-ask spreads have been around 4x a normal market environment during the crisis, we are mindful of the higher costs of trading. However, we think there may be opportunities to add risk on the margins. In particular, we prefer businesses that are likely to be fundamentally healthy over the long term and have ample liquidity in the near term. In addition, we have begun to see increased dispersion in the high-yield and bank-loan markets, which we believe could favor some fundamental-based investment approaches.

Furthermore, we expect to see some investment-grade-rated companies being downgraded to high-yield status in the coming weeks and months. We believe that many of these investment-grade downgrades will present opportunities to invest in relatively high-quality companies at potentially attractive valuations.

Looking forward on the economic front, we think it is increasingly likely that the global economy is entering a recession due to the mounting impact of the coronavirus pandemic. As a result, we anticipate that high-yield and bank-loan defaults over the next 12 months may well rise toward previous recessionary levels. We think many of these defaults are likely to occur in the commodity-sensitive sectors (e.g., energy, metals, and mining), as well as in the retail sector.

1High-yield and bank loan spreads are as of 25 March 2020. | 2Bank-loan prices are based on the S&P/LSTA Leveraged Loan Index. | 3Five-year cumulative default rates are based on annual default rates for the S&P/LSTA Leveraged Loan Index from January 1999 – February 2020. | 4Three-year forward return observations are based on the Bloomberg Barclays US High Yield Index. This analysis reflects the forward three-year total returns of the index since each month-end option-adjusted spread observation beginning 31 January 1994. The use of alternative time periods would yield different results. The spread level of the index was 1.025 basis points on 25 March 2020. Indices are unmanaged and cannot be invested into directly. | 5US high yield is represented by the Bloomberg Barclays US High Yield 2% Issuer Capped Index, European high yield by the ICE BofA/Merrill Euro High Yield Constrained Index, and global high yield by the ICE BofA/ML Global High Yield Constrained Index.


Henri Fouda

US dollar – transient headache
Henri Fouda, Portfolio Manager, Investment Boutiques
Boston

Published: 26 March 2020

Why has the US dollar spiked?
I have long believed that the carry advantage of the US dollar was unsustainable. The coronavirus crisis has precipitated the collapse of that carry advantage. I believe the world, especially the developed world, is flat, with no real carry-trade advantage in evidence anywhere.

If monetary and fiscal policies were the only variables affecting the exchange rate, I believe the effective dollar exchange rate would likely be lower as a result of the relative actions of jurisdictions across the globe. Instead of dropping, however, the dollar’s effective exchange rate has spiked sharply. Market commentators have advanced several theories as to why: liquidity, uncertainty-driven dollar hoarding, risk aversion, the US having the strongest army in the world, the dollar as a reserve currency, margin calls, and so on, all of which may be contributing.

The common underlying theme seems to be the anticipated contraction of the world economy subject to a dual supply and demand shock, with economic activity coming to a standstill in some sectors. Such discontinuities are not usually incorporated into standard economic models. Harvard University Economist Dr Kenneth Rogoff recently likened the current situation to a war in economic terms.

Will currency markets “self-heal”?
Daily exchange rate fluctuations represent not only investment and speculative demand, but also the day-to-day demand that supports commerce, tourism, and all other economic activities. Disruption, or the anticipation of disruption, of those activities could lead to sharp movements in exchange rates. Those disruptions, in my opinion, should be transitory rather than permanent, because exchange rate excesses are “self-healing.”

An example in recent memory is the Swiss franc. It was brutally “unpegged” from the euro during the European financial crisis. This sparked a sharp revaluation. But given the reality that Switzerland was competing directly with its EU neighbors, the exchange rates had to adjust quickly the other way to reflect Switzerland’s less competitive situation.

Look for a correction
Likewise, when normal economic activity resumes — or economic agents anticipate its resumption — it should become apparent that the dollar’s effective exchange rate at the current level is crippling the US and world economies. I think the dollar will correct and potentially overshoot in the opposite direction. In fact, a sustainable correction of the dollar’s effective exchange rate might be an early sign that activity is “normalizing.”


Dave Marshak

Bank loans at an attractive discount
David Marshak, Fixed Income Portfolio Manager
Boston

Published: 23 March 2020

Over the past few weeks, growing concerns around the coronavirus and its potential impact on the global economy have caused steep declines in financial markets. The bank loan market has not been immune from this weakness: The average dollar price of the S&P/LSTA Leveraged Loan Index1 was 78.4 as of 19 March.

Current index price levels imply that roughly 45% of the loan market is going to default.2 To put that in historical context, the highest trailing 12-month default rate actually experienced by the bank loan market was just above 12% in November 2009.3

Using a medium-term outlook, it is our view that the market is oversold at these levels. While we do expect the default rate to increase, primarily in the commodity-sensitive sectors, we don’t believe it will come anywhere near 45%. As a result, we believe the current market offers attractive price appreciation and total-return potential for bank loan investors with a longer time horizon.

Though past performance doesn’t guarantee the future, if investors had bought bank loans at similar prices to today’s in the past, including at the height of the global financial crisis, they would have enjoyed double-digit returns in the following 12 months. In fact, investors who were contrarian during the oversold conditions of 2008 were rewarded handsomely when the market snapped back and returned over 51% in 2009!

1The S&P/LSTA Leveraged Loan Index is a widely used measure of the bank loan market. | 2Estimated default rate calculation based on current market pricing. Assumptions: Any defaulting loan will have a recovery of 60 and performing loans will return to a price of 95. | 3 Source: Moody’s US loan default rate, November 2009.


Jeremy Forster

Fed unleashes stimulus to combat economic hit
Jeremy Forster, Fixed Income Portfolio Manager
Boston

Published: 17 March 2020

Over the weekend, the US Federal Reserve (Fed) took a series of extraordinary measures to support the economy and help ease financial conditions in the wake of the coronavirus pandemic. Specifically, the central bank took the following actions:

  • A 100-basis-point cut in the fed funds rate to a range of 0% – 0.25%
  • Quantitative easing from US$700 billion purchases of US Treasuries and agency mortgage-backed securities (MBS)
  • Coordinated foreign-exchange swap lines with other central banks
  • Improved discount-window borrowing terms
  • Regulatory relief, including scrapping reserve requirements and inserting capital and liquidity buffers to support lending
  • Forward guidance that rates will remain low until the Federal Open Market Committee (FOMC) is “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Some have speculated that the Fed could take policy rates into negative territory as other central banks have done, but in his post-meeting press conference, Fed Chair Jerome Powell pushed back on that notion. We believe further easing will come from the bank’s commitment to keep rates low for even longer, increased asset purchases (potentially establishing a yield-curve control framework), and possible new funding programs and vehicles, including for commercial paper. The Fed is doing all it can, and while its measures should help the economy, the impact from the coronavirus will be profound; we do not expect monetary policy to have the same multiplier effects that it normally does.

Fears about the virus will persist, weighing on consumer confidence. However, low interest rates and low energy prices may help consumers move past their fears and shift from saving more to spending more. We expect to see pent-up demand for many activities and experiences that are nearly impossible to do today (with good reason). And although the unemployment rate is likely to rise in the near term, the longer-term income shock could be mitigated by Congressional actions. At present, proposed fiscal-relief measures appear to include extending unemployment benefits, mandating paid sick leave, expanding Medicaid health services, and providing additional help for hourly workers, potentially via direct cash payments.

We firmly believe that, like other crises, the economic distress caused by the coronavirus will eventually abate, and markets will look forward to better data. As the US and the rest of the world come out the other side, we could see a relatively robust rebound in growth as inventories are replenished and more people are able to return to work.


Haluk Soykan

The burden-sharing problem and the rate outlook
Haluk Soykan, Portfolio Manager, Global fixed income
London

Published: 5 March 2020

I am concerned that no government, not even China, has the technical expertise to think about the solution to the burden-sharing problem for this crisis. In crisis speak, “the fire chief” is currently missing. So somebody will need to step up to help determine a coordinated response to who pays for this crisis. Does the government pay? How much? Who in the government makes these decisions?

The longer the government response takes, we think the greater the probability of a confidence collapse in the system. Furthermore, the government response will require a lot of 0% loans to the constituents who bear losses. So, I believe world interest rates will go to zero and there will be some fiscal financing.


Chris Jones

Is high yield oversold?
Chris Jones, Portfolio Manager, High yield
Boston

Published: 5 March 2020

The sectors that have been hit the hardest in high yield are those you’d expect: energy, leisure, metals & mining, and autos, among others. Overall, I think high yield has probably moved too far too quickly, particularly if we have some stimulus coming.

That said, I’m very cognizant of the fact that if this virus does spread more in developed markets, we could see spreads go significantly wider. So I’m trying to be very tactical. We’re not yet seeing defaults pick up, but if we go to a recession scenario because of the virus, that will obviously have impact on companies with leveraged balance sheets, which would drive a default increase.

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Global Industry views

Brian Barbetta

Where to buy the future
Brian Barbetta, Global Industry Analyst
Boston

Published: 22 April 2020

As I argued in my March 17 post, “Technology: The future is on sale,” now may be an opportune time to “buy the future” at potentially bargain-basement prices, particularly in the technology sector. By way of a follow-up, here is my latest thinking on trends and industries that look poised to emerge as winners (and, conversely, losers) on the other side of the COVID-19 crisis:

Potential winners

Streaming

Digital advertising

E-commerce

Fintech

Digital goods consumption (e.g., video games)

Cloud collaboration tools

Online education

Direct-to-consumer business

Potential losers

Linear TV, cinema

Traditional advertising

High-end retail

Physical branch banking

Physical goods

Business travel

In-class education

Supply chain/middlemen

A number of quality companies in the “potential winners” column have recently been trading at attractive relative and absolute valuations. I believe equity investors should consider using this opportunity to add (or increase) exposure to some of these stocks.


Brian Barbetta

Technology: The future is on sale
Brian Barbetta, Global Industry Analyst
Boston

Published: 17 March 2020

In recent comments, my colleague David Lundgren, director of Technical Analysis, challenges the notion – proliferated of late by TV talking heads and social media feeds – that the stock market swoons over the past couple weeks have created a “can’t-miss” buying opportunity that equity investors should seize upon now (or soon), before it’s too late.

To be clear, David believes (and I agree) that the recent market selloff has created an attractive buying opportunity for long-term investors as markets recover when the coronavirus crisis subsides, although we are clearly not there yet.

However, he also astutely calls out the technology sector has been a notable outperformer during the recent downturn – a bright spot amidst all the market gloom – that he believes looks likely to sustain its recent outperformance as consumers and businesses continue to leverage technology in all its forms:

As a technology analyst, I too expect the sector’s recent outperformance to continue, driven largely by some key trends that all appear to be accelerating along curves that were already pointing upward, including:

  • Streaming consumption replacing linear TV
  • Digital advertising replacing linear models
  • E-commerce replacing brick-and-mortar retail
  • Digital goods consumption replacing physical (e.g., video games)
  • Cloud collaboration tools replacing face-to-face interaction
  • Online education replacing the traditional classroom
  • Direct-to-consumer replacing legacy supply chain/middlemen

A number of stocks with exposure to these and other trends have sold off indiscriminately with the broader market, and are now trading at what I consider attractive relative and absolute valuations. Accordingly, I believe this is an opportune time to initiate longer-term investments in select tech names (or to add to existing holdings).

Like David, I don’t expect to be able to perfectly call the market bottom, but look at it this way: Hypothetically speaking, if the markets were to close tomorrow and then reopen once the worst of the crisis was over, what would you want to own?


David Chang

Oil: From short-term demand concerns to structural supply disaster
David Chang, CFA, Commodities Portfolio Manager
Boston

Published: 9 March 2020

There’s no two ways about it; the OPEC meeting on March 6 was a disaster that could end the Vienna Agreement, reverse the market-balancing efforts of OPEC+ since 2017, and lead to an all-out price war. Amid the shock caused by the coronavirus, oil demand is currently contracting at its fastest pace since 2008. Demand was originally expected to grow by one million barrels per day (bpd) in 2020. Now, we think demand growth could be negative for the year.

What happened?
Prior to the meeting, the Saudis suggested further cutting production to shore up the price of oil in response to the recent coronavirus shock. Russia refused to cut, as this would cede market share to US shale. The Saudis, as in 1986 and 2014, decided they would not go it alone, so no cut was announced. Over the weekend, Saudi Arabia sought to demonstrate its resolve, lowering its official selling price (OSP) by US$8/barrel, the largest reduction in over 20 years. This decision will affect approximately 14 million bpd of exports that compete with exports from Asia, Europe, and the US. As a result, while the market had widely anticipated production cuts of one to 1.5 million bpd by OPEC+, we now could see additional surpluses, driven by a protracted price war.

Potential market fallout
Amid potential production increases from OPEC and Russia, it is important to remember that this is the most oversupplied market of the last two decades, given long-planned production increases from offshore fields in Guyana, Brazil, and Norway, coupled with the recent virus-related demand collapse. While Saudi Arabia is likely to boost production from 9.7 to 10 or 11 million bpd, most other OPEC members are already effectively producing at capacity. The market is in no condition to absorb another million-plus bpd. This move is effectively the Saudis saying that they are unwilling to support the market on their own.

What about US shale?
While US shale production could materially decelerate under US$40 West Texas Intermediate (WTI) crude prices, it would take six to 12 months for the lower rig-account activity to flow through to lower production. In this environment, for prices to stabilize, lower production is required immediately, meaning the oil price will have to fall to cash costs before producers are encouraged to shut in their wells.

Additional concerns and risks

  • The global economy. Does this raise the probability of a recession? Low oil prices clearly benefit the consumer. However, below a certain threshold (I’ve generally assumed around US$40), low oil prices can disproportionately negatively affect the global economy in a much broader sense. Low oil prices stress export and fiscal revenues among several emerging markets and further pressure fragile US industrial activity.
  • US energy (production, equities, and credit). In contrast to 2014 to 2016, US producers have less latitude to reduce costs and enjoy more limited access to capital markets. Meanwhile, this disruption is happening when financial markets are already roiling.
  • Currencies. With a floating ruble, Russia is in a much better position than Saudi Arabia to absorb a price shock. Will Saudi Arabia address this situation through a devaluation or floating of the riyal?
  • Inflation expectations and quantitative easing. As this development potentially extends the duration of low oil prices, might we see even lower inflation breakevens, allowing for additional central bank action?
  • High oil inventories and negative carry. Overproduction will translate into rising oil inventories and a steep contango in the futures curve. This will likely generate a negative roll yield that can invite further systematic selling of oil and extend the price slide.

If there is a tiny silver lining, in the longer term, this decision has the potential to rebalance the oil market by accelerating a slowdown in non-OPEC production, from the US and the rest of the world. OPEC’s restraint since 2017 has allowed non-OPEC production to grow and capture incremental gains in global demand. While we may see this trend reverse, it could be a long process. The focus for now will be on the more immediate consequences of Friday’s debacle in Vienna.


Evan Hornbuckle

US consumer “recession” ahead?
Evan Hornbuckle, Global Industry Analyst
Boston

Published: 9 March 2020

While the US consumer entered 2020 on firm footing, based on what I know today I do think it’s probable that confidence gets hit hard enough to drive at least a few months (and maybe 6+ months) of discretionary spending declines. In such a fast-changing environment, this is clearly impossible to prove today, though we have seen deceleration in the most recent week of our consumer credit card panel data.

Importantly, a large minority of US consumer spending stems from the wealthiest 10% of households. Consumer confidence and household net worth (which correlates highly to equity markets) are big drivers of spending for this cohort, and both are taking heavy enough punches now to suggest overall consumer-spending declines. Depending on how broadly the virus spreads (my base case is a broad outbreak), US jobs could also eventually take a hit, which would disproportionately hurt the lower-income cohort, whose savings rate is perpetually at ~0%. It’s possible the Fed pulls more rabbits out of its hats to counter these pressures, but I’m skeptical; conversely, we could see fiscal measures like payroll tax cuts, which could be a bigger spark to spending.

Sectors that could be hit hardest include cruise lines, airlines, hotels & casinos, restaurants, and malls, among others. Sectors that could be relatively immune include home & personal care (HPC), food & beverages, beauty, housing, and e-commerce, among others. Some stocks in the “hit hardest” category have already gotten hammered 20% – 40% so I’m not suggesting there are no good stocks in that bucket, even if fundamentals are about to roll over. In fact, I don’t find the above delineation (“hit hard” vs. “relatively immune”) overly helpful for forward-looking stock picking because I’m focused as much on assessing what’s already embedded in the stocks as who has the highest/lowest EPS risk. I’m also cognizant that the market will eventually look through the virus-related disruption (likely well before the virus disappears), and I think the consumer rebound could be sharp if a cure is found quickly. So overall I have adopted a conservative mentality, but I am still looking for opportunities to play offense where the market is over-/under-shooting.


Anita Killian

Asia tech as the “canary in the coal mine”
Anita Killian, CFA, Global Industry Analyst
Tokyo

Published: 9 March 2020

The coronavirus turmoil is just another in a long string of challenges faced by the Asia tech sector over the past two decades. First up was the Asian financial crisis, followed by the bursting of the tech bubble, the SARS scare, the global financial crisis, the Thailand floods, the Japanese earthquake, the US-China trade war, and now COVID-19. I think it’s fair to say that Asia tech companies have grown quite resilient in the face of hardship. I call them the “Navy Seals” of the global economy.

I see no reason why the current crisis should be much different from past episodes. Asia tech stocks may have led the way into the storm, but if history is any guide, they may also lead the way out of it. This is because technology is so pervasive in the global economy that it has become nearly 100% coincident with what is happening in real time. Asia tech can be thought of as the “canary in the coal mine,” so to speak.

I would not necessarily rule out a second-half rebound in sector fundamentals. I believe the situation on the ground is much better than might be expected:

  • Demand actually appears to be pretty strong or at least “delayed strong,” meaning the intentions are there, even if not fully acted upon yet.
  • Many factories are nearly fully back in operation as of this writing, while utilization rates are high and inventories low.
  • Prices for many products have been going up and should rise again in April when new second-quarter contracts are signed.

I believe this relative strength and optimism is being driven by trends and forces I highlighted earlier in the year: 5G equipment and handset demand, inventory restocking, memory market recovery, China localization, Chinese semiconductor development, and migrating supply chains. One area that looks dubious to me is the auto market, but that could change dramatically if China stimulus comes through. My bottom line: I think COVID-19 is having a sharp, but likely a fairly short-lived, impact on business in Asia “tech land.”


Bill Ogrodnick

The transportation sector and the supply-chain challenge
Bill Ogrodnick, Global Industry Analyst
Boston

Published: 5 March 2020

The transportation universe I cover is at the focal point of coronavirus current events. Most transportation companies are contemplating two possible scenarios. One possibility is a V-shaped recovery, where the inventory drawdowns due to disrupted supply chains reverse, leading to a surge in demand for transportation services. Under this scenario, transportation stocks are attractive. The second scenario is more bearish. It involves contagion outside of Asia, which appears to be the case right now. This would have a negative follow-on impact on the global economy and could lead to more severe longer-term economic implications.

The year started off strong for the transport sector. It was already at a low point in its cycle, and we were beginning to see green shoots in the form of improving fundamentals. Now companies are reporting that February was weaker than January. Retail inventory levels are declining. This sets up for a possible inventory replenishment cycle later in the year.

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Equity views

Nick Petrucelli

The most hated rally in decades
Nick Petrucelli, CFA, Portfolio Manager
Boston

Published: 18 May 2020

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 retrace its steps backward.

In any event, I would expect sentiment to have improved somewhat by this juncture. Instead, futures positioning and some sentiment indicators (e.g., the AAII Bull-Bear Sentiment Survey) have hit new lows amid a roughly 30% stock-market advance thus far. That’s why I’ve dubbed it “the most hated rally in decades.”

Just how rare is this combination from a historical standpoint? Pretty rare. Figure 1 plots S&P 500 Index returns (horizontal axis) going back to 1990 against the AAII Bull-Bear (level + change, vertical axis) over the same period. During both the 2000 – 2003 and 2008 “bear-market rallies,” sentiment rose sharply just before the rally failed. In contrast, the red square in the chart is where we are now — a complete outlier. It seems to me that with sentiment this poor and policy so loose, a major market pullback in the near term is unlikely.

FIGURE 1
Investor sentiment has stayed depressed even as the market has rallied

Another unique aspect of this crisis is that it is an engineered economic shutdown. As a result, many investors went from very bullish in January to a sobering recognition that the economy was in serious peril by March, making it easy to get overly bearish on stocks in a hurry. Normally, this takes a year to happen, not a couple months. To have a differentiated negative view going forward, I think you need to believe the longer-term economic impact of COVID-19 will be severe. That could be the case, but I don’t believe we will have any clarity on the long-term outlook for a while, potentially allowing the market to climb a wall of worry in the meantime.


Mark Whitaker

Let’s examine those buybacks
Mark Whitaker, CFA, Equity Portfolio Manager
Boston

Published: 21 April 2020

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 well-run companies from their peers, and this period will be no different.

The second point is that suboptimal capital allocation decisions are nothing new. Profits increase during good economic periods, and the resulting cash rarely sits long with the company; it is usually invested or distributed soon after profits are realized. Historically — and still today in some industries — cash has tended to flow toward expanding company assets: building new mills or mines, laying more fiber-optic cable, acquiring land, and many other examples. These have sometimes been poor decisions, sowing the seeds of oversupply, creating painful periods during cyclical downturns, and leaving companies short of cash when they need it most.

Over the past decade, corporations seemed less willing to build ever-greater capacity, possibly because of the scars from the global financial crisis. Cash piled up, and buybacks became a popular outlet for spending it. Some prices paid look poor in retrospect, making owners question those decisions. But I think investors should look in the mirror.

Collectively, we have pushed corporations to optimize everything, from cost structure to capital structure, leaving no spare dollar lying around. If a management team deviated from that norm in recent years, the board or CEO could expect a call from an activist. Large distributions in the form of buybacks naturally followed, seen as easier to flex and more tax efficient than dividends. Might business owners (that is, shareholders) be better off if companies had a chance to be opportunistic — which could mean sitting idle for an extended period and letting cash balances increase? Unfortunately, I believe many investors would contest such a practice.

My overall point is this: Capital allocation is a critical and differentiating skill for management teams. This period will once again demonstrate that. Companies that make good capital allocation decisions — including stock repurchases — while still considering all constituents are the rare gems that I prefer to invest in. I invest with an owner mentality and decades-long time horizon. To me, it’s common sense that a business that helps all its stakeholders succeed can thrive long term. I believe that, as investors, we should support and hold companies accountable for doing right by their stakeholders, and we should do so in a thoughtful, case-by-case manner. We could, for example, back compensation plans with long horizons that give management time to be patient with capital. In my view, creating an environment supportive of successful capital allocation helps all market participants and society at large.


David Lundgren

Does the recent rally mean the bear market is over?
David Lundgren, CMT, CFA, Director of Technical Analysis
Boston

Published: 20 April 2020

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 15% (retracing 38% of losses). But this rally did not end the bear market.

  • In my view, the “Break swing high?” column is the key part of this table (highlighted in blue below). It shows whether each rally after a new low was strong enough to close above the high from the previous rally.
  • Each bear market ends with a “Valid” breakout to new highs. Most bear market rallies, ranging here from 6% to 28%, did not recover above a prior high and were followed by a retest of lows. In three rallies (marked “false”), the S&P 500 closed above prior highs only to later hit new lows.
  • Regardless of the magnitude of the rally, or the size of the retracement, until the market breaks above a prior high, the risk of lower lows cannot be ignored. Even then, they are still possible.
  • I believe there are two key takeaways for the current bear market. First, although the recent 28% rally is high compared to history (15% average), its 50% retracement of the decline is still below the average (64%). Second, thus far, we have not had a breakout (valid or not) above the prior high.

FIGURE 1
Bear markets since 1987

According to recent history, this bear market is likely not over until the S&P 500 closes above the last high of this downtrend (roughly 3,200). Therefore, I believe we are capped to a 2,900 to 3,000 best-case upside potential (which would match the bear market rally historical average of a 64% retracement).

This technical pressure is countered by the Federal Reserve’s wall of liquidity hitting the market, which is likely to keep a floor under prices as we work through the economic hangover of the virus. In my view, this suggests a base-case range of between 2,900/3,000 and 2,600/2,700 in the months ahead.


Gregg Thomas

Defensiveness through a factor lens
Gregg Thomas, CFA, Director of Investment Strategy
Boston

Published: 17 April 2020

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 -6%.

FIGURE 1
US and Europe factor down-market capture

A couple of key observations from the data:

  • Not surprisingly, the value-oriented factors captured more of the downside. Also, DMC was consistently high across regions and value types, including during the COVID-19 sell-off.
  • Over the longer term, companies with high revenue and expected earnings-per-share growth tended to be more cyclical (DMC >100%), while quality growth companies (i.e., companies that grow their capital base at high economic rates of return) were slightly defensive. Factor behavior in Europe during the recent sell-off approximated long-term trends, but this was not the case in the US, where all three flavors of growth held up much better than they have historically, with DMC at or below 100%.
  • Getting to the core of the issue, quality and risk-aversion factors saw a significant change in behavior in the recent episode, although it was more pronounced in the US. For example, the profit stability factor moved from a very defensive profile (64%) to being only marginally defensive (91%). European defensive factors fared better, retaining most of their defensive characteristics.

Importantly, if we focus on the change in behavior during the recent drawdown versus history, the degradation in the US defensive factors is most striking. For example, US low volatility captured 60% more downside in the recent sell-off relative to history. Growth factors held up much better than expected, cutting 30% of their down capture and essentially matching market returns. The only notable results in Europe were that low P/B did better than it has historically (although it still underperformed in the period) and dividends (even the sustainable dividends factor) had a much higher risk orientation.

Why did defensive factors not hold up like history would suggest? We believe there may have been several key drivers:

  • In the first stages of a liquidity event, hedge funds seeking to reduce gross exposure typically sell higher-quality long exposures and buy back lower-quality short exposures — regardless of fundamentals.
  • As investors sell equities to raise cash, the price impact on stocks is generally commensurate to each stock’s liquidity — so smaller-cap and less-liquid holdings tend to see a larger price impact regardless of fundamentals.
  • Low-volatility stocks were a crowded trade, which may have seen selling pressure as allocators reduced their equity exposure.
  • Stocks that are typically in the domain of growth (not quality), such as those with capital-light business models, high profitability, and low cost of capital, justified their higher valuations and did not sell off as hard as history would suggest.
  • In this drawdown, industries that typically feature prominently for defensive factors, such as insurance, real estate, and restaurants/leisure, underperformed, while higher-risk and cyclical areas, such as biotech, transportation, and software, outperformed. This behavior is unexpected if the immediate concern is an economic slowdown, but it makes sense in the context of a global pandemic with everyone at home.
  • Higher-quality dividend stocks have also not protected as much as they have in the past. As we see more direct government support (and with it, political pressure around supporting employees versus shareholders), we could see companies cutting dividends (instead of payrolls) in order to stay solvent in the short term.

David Lundgren

Forget about the market; focus on stocks
David Lundgren, CMT, CFA, Director of Technical Analysis
Boston

Published: 13 April 2020

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, with the S&P continuing higher without a retest of the bottom. Though this would break with longer-term historical precedent, it would mirror what happened in 2019 after the lows of Q4 2018. Until recently, my outlook assigned a 35% probability to this scenario, whereas the combination of the consensus new lows followed by a recovery to a bull market had a 65% probability. However, a strong close above 2,700 could indicate that the best-case scenario is playing out. In fact, at this point, I am actually leaning toward no new lows, particularly since so many investors (bull and bear alike) expect them. Importantly, however, I believe it really doesn’t matter.

Either way, the waterfall decline should be over
Regardless of whether or not we get new lows, the market should now begin to differentiate between the winners and losers of the next cycle. This impending differentiation is what drives the “divergences” that characterize a bottoming process. Specifically, divergences develop as the index moves to new lows, but most stocks do not follow. At the same time, sentiment does not get as bearish, and correlations and volatility do not get as high (i.e., the macro-driven waterfall is over).

This list of inputs is generally referred to as market internals. If we are indeed in the beginning phases of a bear-market bottom, as I believe we are, we should not see market internals go to new lows, even if the index itself does. This would mean we need to shift our emphasis away from macro-technical conditions (the market) toward micro-technical conditions (stocks). In other words, as the waterfall decline ends, the market is no longer all that matters.

It's time to focus on tomorrow’s leaders
We should therefore focus on recognizing the factors, regions, industries, and stocks that the market is selecting for future leadership. Of course, the market constantly differentiates between winners and losers, even during waterfall declines. Importantly, divergences would make this differentiation more pronounced. Until recently, winners have been safety, growth, momentum, the US, China, and stocks that benefit from COVID-19. Losers have been cyclicals, value, Europe, and stocks that are in harm’s way of COVID-19. From here, as we transition regimes from waterfall back to bull cycle, some mixture of new leadership should begin to emerge, whether we retest the bottom or not.

Bottom line
Though the market could fall to new lows with no divergences to speak of, this scenario is not in the cards for me. In my view, even if it does move lower, the S&P 500 will hold near our previous bottom and there will be clear differentiation between winners and losers. If that is the case, I believe investors should start looking for leaders now.


Vera Trojan

EM equities: Pick your spots
Vera Trojan, CFA, Equity Portfolio Manager
Boston

Published: 6 April 2020

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, country-by-country differentiation — will be critically important to success in emerging markets investing:

  • Fiscal vulnerabilities in individual countries will likely be amplified by the pressing need to address the ongoing health crisis.
  • Government mismanagement of the crisis and its fallout could have profound human and economic consequences in certain countries.
  • The broad ideological shift from market liberalism toward more state intervention and unpredictable leadership may gain traction.

Bottom line: A firm understanding of the social, political, and economic dynamics on the ground is going to be key to evaluating an emerging markets investment. Of course, this has always been true, but I believe it will be even more so going forward.


Wency Cromwell

The world is watching
Wendy Cromwell, CFA, Vice Chair, Director of Sustainable Investing, and Portfolio Manager
Boston

Published: 30 March 2020

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 of 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 layoffs down the road, their first capex cuts this week did not include any reduction in force. They plan no change in their commitment to their energy-transition strategy. In fact, management believes this crisis may accelerate action on climate change, because it has given the world a stark picture of what massive economic and societal disruption looks like. They cited a strong culture of collaboration among the board and management teams, who say functioning as a team is paying off during this crisis.

Michael Shavel, CFA
ESG Research Analyst

I think times of crisis help investors get a better sense of whether companies do what they say they do. It’s easy to publish a shiny sustainability report that highlights how employees are key assets, suppliers are partners, and customers are the lifeblood of the business. But during tough times, we get to see how boards and management view and prioritize various stakeholders. There’s no one right way to go about it, but we should at least be looking for consistency between the message we’ve been hearing and the actions being taken. A lack of consistency might suggest that we apply more skepticism to other elements of the business narrative.

Mark Whitaker, CFA
Equity Portfolio Manager

Will companies pay employees during the shutdown? How are companies prioritizing the safety of their workforce? My recollection is that after September 11, 2001, and during the global financial crisis, layoffs were broad and cold. While the subject of layoffs is always painful, I am heartened that thus far — this time, and in a small way — it feels different. When this period is over, will we be able to point to real differences? Will the view of certain corporate cultures be enhanced? I’ll be interested to see.

Prachi Shah, CFA
Global Industry Analyst

The key difference between my flow-through assumptions last week and what the company provided today, is that they will be paying some inactive labor. I think we can apply this assumption to other similar businesses. It is the right thing to do for society, and it will probably set a precedent.

Jessica Fry
Business Associate

We should keep thinking about how all companies in the portfolio interact with customers. This could be a differentiator, depending on consumers’ reaction. Many airlines and hotels are offering refunds for customers not wanting to travel. Grocery store chains are making it easier on shoppers with “elderly hours.” I think the effects on corporate culture and customer relationships are going to last a lot longer than the market impact.

Mark Mandel, CFA
Equity Portfolio Manager

A large home-improvement retailer announced it is temporarily adjusting store hours to better serve customers and communities in response to COVID-19. The company understands that this action is essential to the communities it serves, and says it is committed to keeping stores open during times of crisis and natural disaster.

Eunhak Bae
Global Industry Analyst

On a call last night, the CEO highlighted various employee and community actions the company was undertaking. I thought it was a strong statement of its commitment to be a good corporate citizen and of confidence in its financial health. The actions included bonuses for lower-level employees, emergency-fund relief for employees facing financial hardship, supply-chain support for protective equipment, and help for small business vendors with liquidity issues. I plan to give management positive feedback when we speak to them next week.


Mark Mandel

Saints and sinners
Mark Mandel, CFA, Equity Portfolio Manager
Boston

Published: 25 March 2020

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 are likely to remember companies’ actions during this crisis for a long time. I believe the ability to hire, rehire, and retain talent will be shaped by reputations developed now. Brand loyalty may be gained, strengthened, or lost based on how customers are treated. And so on. If an investor is asking questions like these today and considering the inputs when making investment decisions, then ESG is part of their framework.

For better and for worse, the media is becoming more focused on corporate behavior. The Financial Times has added a “Saints and Sinners” section to its Moral Money newsletter, this week lauding a few producers of emergency health care supplies and criticizing a few online retailers, pharmaceuticals, and even professional sports teams.

Our colleague John Averill asked in Morning Meeting yesterday about best practices for treating employees during this crisis. I have learned that the answers are very case-specific. Some companies that have financial flexibility and benefit from strong current business trends can go a long way to help. Technology companies and grocery chains are two that come to mind. Some companies may want to do the right thing but are less flexible, hamstrung by the size of their workforce and the realities of the current environment. Hotel chains or food service companies are recent examples. Even companies that seem best-positioned to weather this storm may have to grapple with important employee welfare issues, including childcare, heightened stress levels, and, of course, illness.

In his recent book, Skin in the Game, author Nassim Taleb talks about via negative; essentially, we know what is wrong with more clarity than we know what is right. I find this to be especially true about company actions today, and about ESG in general.

In sum, there is no one “right” approach for companies to take. Each must consider a matrix of options and stakeholders, including employees, customers, and shareholders. And their choices are constrained by their specific financial reality. Investors need to apply judgment, just as with traditional fundamental analysis: Is a company doing a good job reaching balanced decisions, given the multidimensional issues it faces? Are management’s choices consistent with its culture and strategy? Are these behaviors consistent with the reasons why you own the stock, and with your time horizon for investing?


Michael Carmen

We’re all in this together
Michael Carmen, CFA, Co-head, Private Investments
Boston

Published: 23 March 2020

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 outperform in the long term.” Remember, while some of these prices will probably look amazing two years from now, they could still look horrible next week.
  3. Stay true to your investment philosophy because it will ultimately serve you well. The worst mistake I made during the global financial crisis was getting more conservative at the beginning of 2009. It was a bad decision and led to a period of disappointing performance.
  4. Stick to your guns, but always be flexible as new data arrives. A flexible mind is a sign of strength, not weakness. Don’t be afraid to adjust your “philosophy and process” if you believe there are ways to make it stronger. After that period of poor performance in 2009, we added our Up/Down valuation framework, and we have never looked back. Time and again, it has been super helpful in giving us a much better quantitative view of the downside if a thesis didn’t play out.
  5. As our colleague Mark Whitaker likes to say, “Stocks can always go lower.” In 2009, the poster child was Las Vegas Sands, which dropped 99% from its high. Don’t anchor yourself into a specific price. The old adage that the market can remain irrational longer than you can remain liquid is true.
  6. For younger investors (maybe old ones too), don’t be shy about reaching out to us veterans. We’ve been through this and can provide perspective. Ask us anything: Would you upgrade this stock? Would you sell here? How is this different or like the time when…? We are here to help, and we want to help. I’m happy to do a video call with anyone who is interested. Plus, as an extrovert stuck at home, I crave interaction!
  7. Sleep! I know it is very stressful and I’m sure everyone has lay awake in bed at 2:30AM, wondering what could possibly be coming at us next. I know I have. But none of us can make good decisions for our clients if we are sleep deprived. And we don’t have to commute to work right now, so we have all that time back. In our tenet “client, firm, self,” self might be last, but it’s still a priority. Take care of yourself.

In my 21 years at Wellington, even in the depths of these bear markets, I have always wanted to come to work because I knew I was sharing the experience with my colleagues. We are all in this together. I’ve now experienced three horrible, stressful, life-changing periods in the markets. It is awful. No one likes to lose money. No one wants to underperform their benchmark. But as another veteran investor, retired portfolio manager Ed Owens, once said, “Betting against the survival of the universe has been a bad gamble for millions of years.”


Gregg Thomas

Factor insights: A drawdown comparison to the GFC
Gregg Thomas, CFA, Director of Investment Strategy
Boston

Published: 16 March 2020

I have heard many comparisons between the current crisis and the global financial crisis (GFC). To me, this shock feels similar in terms of uncertainty, but somewhat different from a factor perspective. We compared the first two months of the GFC and the four weeks ended March 13; these two periods equated to about a -25% market decline. Several high-level observations stood out:

  1. Key takeaway: The worst-performing factor was clearly solvency risk, followed by value. We think the market has been engaging most on companies that might not pass the “going concern” test in the face of the first real growth shock we’ve seen since the GFC, and that these companies are seeing a massive increase to their discount rates. Our definition of solvency looks at the relative distance to a default (similar to the model used by credit-rating agencies), identifying distress at the individual company level by considering the interaction between capital structure and stock-price volatility. For capital structure, we look at leverage on the balance sheet and add back fixed-cost structures such as lease obligations, pensions, etc.
  2. This isn’t just a reaction to leverage. Looking across our factor returns, there is a direct correlation between a factor’s exposure to solvency risk and excess return. Leverage is much less explanatory. Overall, the market is pricing high solvency risk nearly three times more than high leverage.
  3. Unlike the first hit of the GFC (September and October of 2008), this time around there is not as much on the other side from a style perspective to cushion the blow (e.g., low volatility and profit stability factors are ahead, but not by much).
  4. Up to now, the weakness in value factors has far outstripped the gains in defensive and quality factors. During the GFC, this was more balanced.
  5. Dividend yield has not protected like it did in 2008, largely because the highest yielders are in energy and financials, which have higher exposure to solvency risk.

Given continued high uncertainty, we are being thoughtful about factor exposures, solvency risk, and stock-specific risk, and when in doubt, we are taking the defensive side.


David Lundgren

Preparing for even more volatility
David Lundgren, CMT, CFA, Director of Technical Analysis
Boston

Published: 16 March 2020

Other than direction, what distinguishes uptrends from downtrends is their different return and volatility profiles. Uptrends are the result of investors’ steady confidence in their market outlook, which is constantly reinforced as the market marches higher. This momentum feeds on itself, emboldening investors to buy every dip. As a result, uptrends provide strong returns and low volatility, producing a very attractive Sharpe ratio.

Downtrends are quite the opposite. Uncertainty about the market outlook materially undermines investor confidence, flipping the behavior from buying dips to selling rallies. From time to time during downtrends, we get multi-standard-deviation rallies. These are often headline-induced gyrations that ultimately fail, repeatedly dashing the hopes of investors. Eventually, a new sort of confidence returns to the market, where investors are “confident” that the world is going to end so they proceed to sell everything, regardless of price. Then we bottom. This combination of progressively lower prices and extreme intermittent volatility results in a very unattractive Sharpe ratio.

The current downtrend is no different, and investors need to prepare for an even more volatile period. In the autumn/winter of 2008/2009, after September’s 20% decline from all-time market highs was already on the books, multi-standard-deviation rallies of 5% – 10% became “normal.” Each one was driven by hope, triggered by some unprecedented government intervention or exciting headline. In all cases, my personal bottom-identifying checklist of trend change never indicated an actual change. In other words, the trend remained down despite these voracious rallies. Worse, the ensuing percentage decline to ultimate crisis lows was still at least another full bear market, or -20%, away.

This is not a forecast, and I’m not suggesting we doubt every rally, but until the trend shifts from down to up, there is little reason to chase hope-fueled upticks that run the risk of failing.

In 2008, we referred to the investor fear that spread through markets as “contagion.” Today, in addition to the actual contagion of the coronavirus itself, we are dealing with investor contagion that is responding to policy contagion. As leaders try to stem the spread of this virus by canceling events, closing attractions, and declaring states of emergency, the pressure increases on private-sector leaders to respond similarly or risk indictment, in hindsight, for doing nothing. We are hearing questions like, “Is it too soon to buy?” and “Is it too late to sell?” Both queries share a tinge of hope that the lows are in. Both are essentially asking “Are we going lower?,” implying that the panic button has yet to be hit. If consensus was that the market had farther to fall, these questions would be different. People would be asking, “How much cash should I withdraw?,” “How safe is my money market?,” or “Which should I stock up on, soup or beans?”

I do not have the answers, but that is mostly because, as a trend follower, I don’t ask many questions. Trend following is about identifying what is happening and doing that until it is no longer happening — without making forecasts as to when conditions might change. It’s not perfect. One criticism we often get is that trend-following strategies only do well over the long term because of “crisis alpha,” meaning they protect capital when things really go bad. Guilty as charged. If compounding is about digging small holes during downtrends and fully participating during uptrends, then I believe trend-following potentially offers a solid, repeatable approach. In the current environment, digging small holes is paramount until better market conditions return.


Vera Trojan

Thoughts on a complicated crisis
Vera Trojan, CFA, Portfolio Manager
Boston

Published: 12 March 2020

As a longtime emerging markets investor, I have faced more than one major crisis. The current environment, however, strikes me as more complex than any I have seen.

It is developing as an interplay between a health crisis, a further unraveling of the post-World War II geopolitical order, uncertainty caused by climate change, a potential financial crisis, and a fundamental rethinking of the role of business and the investment industry in society.

As I think about all these factors, crisis investing 101 is an obvious place to start:

  • Be wary of illiquidity and debt.
  • Try to take advantage of opportunities to upgrade your portfolio.
  • Avoid banks and other leveraged financials.
  • Be prepared for extreme volatility.
  • Try to take shelter in stable businesses with solid balance sheets in economically and politically stable countries.

The other framework I am using is time horizon: What will be the shortest- and longest-lived aspects of the challenges currently upon us? Arguably, the coronavirus itself will be the first to pass, with consumer fear abating. Quality names in the most impacted sectors, such as travel and entertainment, may be the first to recover. Longer term, a financial crisis is a real risk, given the leverage, volatility, and illiquidity already in the system. Banks, which will be at the center of any storm, are already suffering due to record-low interest rates and slower growth. In my view, even the highest-quality banks will not be spared if a real crisis unfolds.

Geopolitical discord will also be with us until a new order emerges. The challenges of a multipolar world are myriad, and in my mind, the seeming unraveling of OPEC is a symptom. As it is difficult to imagine the players coming together again, it may be prudent to underweight oil. While most of Asia benefits from structurally lower oil prices, the stresses in the Middle East could become more acute and destabilizing.

As China and the US are the two pillars of a multipolar world, they also are likely to be key components of long-term investment strategies. China has been the first country to bring the coronavirus under control and its stock market has performed relatively well in a global context. I think attractive ideas potentially include top internet players, consumer cyclicals, and service providers. Outside of China, my team and I are looking for idiosyncratic structural growth businesses, such as certain research-driven pharmaceutical companies and various technology names.

Finally, we may find ourselves struggling to identify the floor in this severe market dislocation. In emerging markets, that has traditionally been marked when an outside player such as the US Treasury or the IMF steps in to restore confidence and liquidity. In developed markets, international cooperation will be required to restore order and confidence.


Greg Mattiko

Anchoring to absolute valuation
Greg Mattiko, CFA, Portfolio Manager, Emerging markets
Hong Kong

Published: 9 March 2020

Predicting the “then what” after an event like the coronavirus is notoriously difficult in my experience. I remember the market trying to guess the “then what” to the possibility (pre-outcome) of Brexit and the election of Trump in the US and Bolsonaro in Brazil. Not only did the market not anticipate that those events would happen, but the “then what” thinking that prevailed in the face of those unknowns turned out to be the opposite of the market outcome.

Does that mean we shouldn’t think about these things? Of course not. My approach is to imagine various outcomes but put very little probability weight on any one outcome. I then anchor back to the one thing I can observe: absolute valuation at the single-stock level. I think we’d all agree that prices move faster, and in a more exaggerated manner, than fundamentals. This is the basis for the existence of active management. And managers, of course, use many different valuation lenses. Mine is firmly focused on absolute, discounted cash-flow-based valuation. This is a lonely way to operate when the market seems to have dislocated from absolute valuations. In times of stress, however, looking at absolute valuation can be a useful anchor. In my experience, the combination of big price dislocations and an absolute-valuation framework can potentially lead to significant opportunities.

How much one adjusts one’s discount rates is a key question right now. I am certainly increasing mine, as uncertainty is on the rise. The fragility of the financial system in the face of recession is one example of a fat-tail uncertainty on my mind. My valuation work suggests that the prices of many emerging market stocks have not yet digested this possibility.


Niraj Bhagwat

No “memo” announcing the crisis is over
Niraj Bhagwat, Portfolio Manager, Asia-Pac equity
Singapore

Published: 5 March 2020

The prospect of government support for the economy can help investor sentiment, but room for policy responses to today’s crisis is nowhere near what it was in 2008 – 2009, in both China and elsewhere. However, I believe such a response is not necessary for asset prices to go up, including equity markets in Asia, partly because the cost of capital is low and there is ample money in the system that is not going toward productive capital capacity. It is important to note that certain industries and companies in Asia, especially those that are fundamentally sound, can do well regardless of policy support for the global economy. In fact, many have done so over the past five years even when their country’s GDP growth has come in disappointing.

For my part, I haven’t made any meaningful changes to my portfolios since this crisis erupted, but instead am using this opportunity to add to certain holdings at the margin. I believe specific areas of opportunity may include the education industry in China — in particular, online education, which has experienced growth amid this crisis due to fears of being exposed to the virus. That growth may be sustainable going forward, in the same way the SARS scare helped fuel a trend of more people working from home that then kept gaining traction. Even sectors and industries more in the “eye of the storm,” so to speak — for example, travel/tourism in China — in my opinion, may offer select opportunities at good prices now. Smaller Asian markets like Indonesia have a narrower range of opportunities, but they still exist for discerning investors.

The bottom line for me is that, as a stock picker, I’m very focused on evaluating stocks and companies on a business-by-business basis even when there is a crisis like this. There won’t be a “memo” announcing when this one is officially over, so making major investment decisions based on trying to “time” the end of the outbreak is ill-advised, in my view.


Don Kilbride

Raking leaves in the wind
Don Kilbride, Portfolio Manager, Dividends
Boston

Published: 5 March 2020

A few thoughts:

  • The current environment feels a bit like raking leaves in the wind. It seems like a doable task when you are inside looking out the window. But it isn’t. Either your portfolio was set up for this or not. If it was, you were (on some level) lucky. And that’s ok.
  • The head of our trading group made an important point. It’s very expensive to transact right now. And it’s very hard to know what levers to pull. So why spend more when you know less?
  • We get really distracted in moments like this. For example, did anyone else know Jack Welch died or North Korea fired ballistic missiles into the sea? The impact on markets of those events will be low, but still the world goes on.
  • Finally, is this healthy for markets? At a recent client meeting, I made the point (a little off script) that moments like this can be healthy. The market needs to be reminded that risk isn’t free after all. Discount rates can’t be zero. It’s a risky world growing ever more risky. Markets ought not shrug off every risky moment. To be clear, this is not something we have wished for, as it comes with great personal and societal cost. But I think we will solve this… more quickly and efficiently than seems possible at the moment. That said, as investors, I think waiting for the wind to die down a bit is a good plan.

Phil Ruedi

Applying past lessons learned
Phil Ruedi, CFA, Portfolio Manager, Mid-caps
Boston

Published: 5 March 2020

A few broad comments I would share:

  • When you run into situations like this, continue to focus on what you’re supposed to do for your clients. If your clients pay you to take risk, then take risk. If they pay you not to take risk, then don’t take risk.
  • Limit the number of decisions you make. Even very good investors are going to be wrong at times. This situation is very fluid, and so the more decisions you make, the greater the potential for mistakes.
  • Practice mindfulness. There’s a lot of information to sort through. Your subconscious and your conscious are working through that information. Try to listen to both.
  • Don’t be complacent. If you’ve outperformed the past few weeks, it doesn’t mean you’ll outperform the next few weeks. If you have underperformed, don’t get down on yourself. Periods of underperformance are to be expected during volatile markets.
  • Don’t follow someone else’s path. Take the information available and decide where your conviction is. Then develop a plan and follow it.
  • Don’t worry about next quarter or the quarter after. Think about what this means for the world two years from now. How will it affect people and the way they do things? Will remote computing be much more common? Will supply chains change dramatically?

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This commentary is provided for informational purposes only and should not be viewed as a current or past recommendation and is not intended to constitute investment advice or an offer to sell or the solicitation of an offer to purchase shares or other securities. Wellington assumes no duty to update any information in this material in the event that such information changes.

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