A Better Approach to Risk Parity
The tenets of risk allocation are widely accepted, so why has risk parity felt like such a disappointment over the recent past? The problem, according to Joshua Kutin, Head of North America Asset Allocation, is borne out of a static or “strategic” approach to risk allocation, which locks in tight ranges of risk weights regardless of market conditions.
U.S. GDP Expectations Revised Higher
We're increasing our U.S. growth forecast for 2021, writes Head of Multi-Asset Strategy, Anwiti Bahuguna, given increased fiscal spending. But a lot depends on the successful distribution of vaccines.
Long-Term Trends Drive Emerging Markets
Emerging markets will continue to benefit from the convergence of many long-term trends according to Dara White, Head of Emerging Markets Equities. A growing middle class, buoyant domestic demand and strong corporate managements are just a few of the factors he believes will drive EM in the coming years.
Fixed-Income Outlook: Focus on Credit
In 2021, credit analysis will be the primary source of bond market outperformance according to our fixed-income team. Financial strength and relative valuation will be key levers for downside protection in a bond market with an imbalance of opportunity.
Emerging Markets: Alpha Potential Through Responsible Investing
Emerging markets are a perfect opportunity set for the application of responsible investing principles, contend Young Kim, EM portfolio manager, and analyst Kyle Bergacker. They believe Columbia Threadneedle's environmental, social and governance research framework enhances traditional datasets in a complementary manner to better identify quality companies within emerging markets.
High-Yield Forecast: Defaults Have Peaked, A Return to Normal
Our High-Yield Credit Research Team's forecast indicates that defaults have peaked and that over the coming months a return to an environment more in line with long-term historical averages is likely. Any downside would most likely come from higher-than-expected defaults in the energy, real estate, leisure and transportation sectors.
Not Just a Matter of Style: International Stocks Should See Rotational Benefits
International stock returns are linked to the growth/value cycle, explains Fred Copper, EAFE Portfolio Manager. He sees both value and non-U.S. stocks as the beneficiaries of a new economic cycle.
Vaccines, Lockdowns and Equities
COVID-19 cases are rising at an alarming rate in the U.S. and Europe. So why are equities reaching new highs? Toby Nangle, Global Head of Asset Allocation, seeks to unravel this market dynamic.
Too Few Eggs: Index Concentration, Style and Portfolio Risk
The response to vaccine news was an indication of how quickly market leadership can shift. Jason Wang, Head of Quantitative Research, discusses issues facing growth and value investors in a market that has been dominated by a small number of stocks.
High Yield Bond Default Forecast
The uneven nature of this recession and recovery has placed a premium on credit research. Kris Keller, Head of High Yield Research, discusses our most recent credit default forecast, noting the contribution “fallen angels” have made to the quality of the asset class.
Additional reading: Fallen Angels and The Importance of Credit Research
Data shows that, as a group, fallen angels have outperformed the broader high yield asset class after entering the index. Chris Jorel, Client Portfolio Manager, highlights the importance of credit research as a flood of downgrades has increased opportunity within high yield.
Biden Passes 270: What Does it Mean for Investors?
While we await certification, Joe Biden appears on track to be the next president of the United States. Global Chief Investment Officer Colin Moore explains how a divided government and narrow victory may impact Biden administration policies — and the potential sector impacts.
Election Anxiety and Long-Term Investing
Elections don't have as much influence on market cycles as you might think, suggests CIO Colin Moore. He puts the 2020 race in perspective for investors in his latest paper.
Big Deal? China Added to WGBI Index
Is the inclusion of China in the FTSE World Government Bond Index significant or symbolic? Fixed-income analysts Ed Al-Hussainy, Senior Interest Rate and Currency Analyst, and Lin Jing Leong, Senior EM Asia Sovereign Analyst, look at what this next step in China's capital markets development may mean for global fixed-income investors.
Credit-Worthy Consumers Buttress Structured Bonds
Does investing in the consumer sector still make sense? Kris Moreton, Client Portfolio Manager, looks at the current data on consumer loans and provides an outlook on mortgage- and asset-backed securities.
How a Biden Win Could Change the Investment Environment
If Joe Biden wins the election, sector winners and losers are likely to change — the degree of which will be influenced by the Congressional election outcome. The Columbia Threadneedle research team has been delving into this issue and has compiled a sector-by-sector analysis of the potential implications for a Biden victory.
Brazil Equities on the Cusp of Change
Dara White, Global Head of Emerging Markets Equity, explains how a perfect storm of lower rates, technology adoption and deregulation is laying the foundation for a new era of equity investing in Brazil. Dara also discusses what investors should consider in their emerging market allocations as a result.
COVID-19: Estimating the Impact of Market Disorder on Asset Prices
Asset prices contain enormous amounts of information. Toby Nangle, Global Head of Asset Allocation, examines how asset allocators may be able to differentiate the impact of market expectations versus liquidity conditions on current prices to make better informed allocation decisions.
Downgrades, Defaults and Dispersion
Bond yield spreads appear to be normalizing after the crisis-induced selloff, but Deputy Global Head of Fixed Income, Gene Tannuzzo, believes headline data is obscuring the full story. In this paper, he examines current areas of opportunity and risk within the credit markets.
Positioning for a Slow and Gradual Recovery
Our five-year capital markets forecast in January anticipated a recession sometime in the next five years, but not this year. Anwiti Bahuguna, Head of Multi Asset Strategy, discusses how the pandemic-driven recession brought forward its effects on asset classes earlier than anticipated, but did not materially alter the long-term outlook.
Additional reading: The Long Road to Higher Ground
Ms. Bahuguna assesses the recovery ahead, the positive forces at work and what to look for as the economy rebuilds.
The More Things Change…
Two quarters of market volatility appear to have only honed market trends that were in place prior to the pandemic: the persistent strength of growth stocks and narrowing market leadership. Jason Wang, global head of Quantitative Research, reviews the current equity market landscape.
Convertibles Take Off
Record new issuance in the convertibles market could be changing that market permanently. Dave King, our convertibles portfolio manager, talks about why this new influx is different and could result in permanent change for the asset class.
Recovery: 5-Year Capital Market Assumptions
Since the last analysis by the Global Asset Allocation Team, the longest expansion on record was brought to a screeching halt because of the coronavirus. We expect a large hit to growth in 2Q 2020 and a recovery to begin in the second half of the year. Given their quick round-trip, our equity market forecasts for the U.S. are, by and large, unchanged, but we expect slightly higher returns in international markets.
Are Financial Markets Ahead of the Economy?…And Should They Be?
Were investors too optimistic as stock market indices rose sharply from their March lows? Chief Investment Officer Colin Moore considers whether equity markets got too far ahead of the economic data as they closed in on prepandemic levels.
The Other Shoe Drops
In many ways, the coronavirus outbreak and economic shutdown merely exacerbated already bleak trends for retailers. Retail Analyst Mari Shor looks at how the pandemic is effecting change in the U.S. retail industry—it is not all bad news.
It’s unlikely that we will return to a world that’s the same as it was prior to the pandemic shock. It’s very likely that we’ll see structural changes and an acceleration of trends that were already in play—in the healthcare and energy industries to name two. Our investment team surveys past recoveries for clues as to how the current recovery may play out.
The Consequences of the Shutdown
An intentional shutdown instituted to slow the spread of COVID-19 brought one economic cycle to an end and started a new one. Anwiti Bahuguna, Head of Multi-Asset Strategy, evaluates the current recession and recent positive economic data and reminds us that for the foreseeable future, any optimism regarding a recovery will be tempered by the realities of the pandemic.
Where to from Here – A Quantitative Assessment
While this new market cycle is relatively young, it appears that many of the factors driving the market prior to the pandemic’s outbreak were resilient in the face of the market turmoil. Jason Wang, Global Head of Quantitative Research, briefly reviews where some key indicators stand in this suddenly new market environment.
Oil Prices and Market Volatility
The relationship between stock market volatility and oil price volatility has been fairly stable—until recently. Josh Kutin, Head of North America Asset Allocation, looks at the relationship between oil prices and the equity market to conclude that oil price volatility may be affecting equity volatility and could have spillover effects in other asset classes.
Oil Prices Tank
Oil prices dropped below zero for the first time ever in April. Marc Khalamayzer, Senior Portfolio Manager, and the Columbia Threadneedle Energy Equity Analysts examine why and provide their views on demand, supply, storage and pricing.
The Shape of the Recovery
The U.S. economic recovery depends the rate of COVID-19 spread. We currently expect a "u-shaped" recovery, meaning that it will take 10 calendar quarters for the U.S. to get back to prior levels of activity. The attached chart illustrates how we could get there.
Regroup, Reframe, Recover
Chaotic market selloffs reaffirm the need for a rational investment approach. Raghavendran Sivaraman, Head of Systematic Strategies, reviews the recent and historical drawdowns to suggest a way for investors to frame an eventual recovery.
An Intentional Shutdown
An intentional pause in economic activity has sent unemployment claims skyward, Anwiti Bahuguna, Head of Multi Asset Strategy, looks at how long and how deep a contraction it may be. It’s an unusual situation because the current recession is unlike any that have preceded it.
Credit Spreads Reach Historic Levels
Colin Lundgren, Global Head of Fixed Income, and Gene Tannuzzo, Deputy Global Head of Fixed Income, provide their views on appropriate positioning for the current market. In the short run, challenging liquidity conditions can exaggerate price moves, but historically, investing when credit spreads are at these levels has yielded positive returns over a forward 12-month horizon.
The economy catches COVID-19: what happens next?
Chief Investment Officer Colin Moore discusses how the market’s response to the spread of the coronavirus is driven by both the actual slowdown in economic activity and an exaggerated response to virus fears. This is a temporary phenomenon, Moore believes, not a structural change in the global economy, and investors need to remain focused on their long-term investment goals.
Recession Risks: Coronavirus + Oil Shock + What Else?
As quickly as the coronavirus appeared and threatened the global supply chain, it has just as swiftly impacted global demand. Anwiti Bahuguna, Head of Multi-Asset Strategy, evaluates the current and potential risks to the economy as virus mitigation efforts shutter whole countries and collapsing oil prices destabilize markets.
Coronavirus Surges and Market Volatility Follows
Josh Kutin, Head of North America Asset Allocation, and Anwiti Bahuguna, Head of Multi-Asset Strategy, evaluate the current and potential impacts of the spreading coronavirus. While the market response may create opportunities to add to risk, the uncertainty about containment and the impact on the global economy suggests an extended level of caution.
Value Looking for Some (Positive) Momentum
Factor investing endured a rough year as the cheap got cheaper and already highly valued stocks led the market higher. Jason Wang, Global Head of Quantitative Research discusses just how unusual 2019 was and how a lack of investment themes worked to counter normally robust quantitative strategies.
The Biggest Shifts of the Decade: 2010s in Charts
The technological and monetary promise of the internet came to fruition last decade, while demographics, consumer preferences and the financial landscape underwent radical change. We asked our research teams to identify significant trends that will continue to shape investment decisions into the next decade.
Coronavirus and the Outlook for Emerging Markets
Dara White, Head of Global Emerging Markets Equity, provides an assessment of the impact the coronavirus outbreak may have on global and emerging markets, and where it stands in comparison to the SARS outbreak in 2003.
All Fall Down
Everyone loves momentum on the way up, but on the way down, not as much. For market cap weighted indices, there is a clear pattern observed in the performance of the largest constituents: after hitting a peak weight, crowded trades can weaken quickly, writes Preston Schwartz, Quantitative Analyst, and Jason Wang, Global Head of Quantitative Research. For active managers, these can be critical periods to deliver outperformance.
Which Market Had the Best Performance in the Last Decade: China, Japan, Europe or Emerging Markets?
While the U.S. was dominating global equity markets, Japan quietly outperformed China, emerging markets and Europe over the last ten years. The past decade's results were shaped by domestic corporate reforms and cultural changes, as well as the growing demand for technology, explains Daisuke Nomoto, Head of Japanese Equities. These are positive trends, we believe, that will drive the Japanese market for years to come.
What Inversion? Fourth Quarter 2019 Fixed Income Update
The Federal Reserve put in place its third and final rate cut for 2019 during the quarter, moves that reversed three out of the four rate cuts in 2018. This seemed to restore calm in the markets, as the 10-year Treasury yield, in decline for much of the year, was range-bound for the remainder of the year. Our U.S. Fixed Income Team reviews fourth quarter market drivers, as well as their near-term outlook for bonds.
A Notch Lower: 5-Year Capital Market Assumptions
Forecasted returns have declined since the last analysis by the Global Asset Allocation Team. Even before trade policy risks intensified, financial markets were signaling caution — culminating in certain parts of the yield curve inverting. Implied returns are lower for equities and bonds because nominal growth expectations are lower, and valuations for both equities and bonds are stretched. Review our semiannual update of capital market return forecasts used in strategic portfolio allocations.
2020: U.S. Growth Slows to Boring
In the absence of more stimulus, such as government spending or tax policy changes to induce additional consumption, we expect economic growth to slow to trend levels in 2020, with the pace of job growth likely to slow down relative to 2019 explains Anwiti Bahuguna, PH.D., Head of Multi Asset Strategy.
Traditional Valuation Falls Short: Understanding Intangible Assets
Hard to see. Hard to define. Hard to value. Intangible assets are a critical component of a company's value. Columbia Threadneedle Investments, in conjunction with Institutional Investor's Custom Research Lab, researched the topic of intangible assets and the importance of fundamental analysis in uncovering hidden value.
Asset Allocation Challenge: U.S. High Yield Bonds or Leveraged Loans?
High yield bonds and leveraged loans are often compared due to their diversifying and income enhancing characteristics. But Chris Jorel, Client Portfolio Manager, High Yield Bonds, points out the current dynamics of the two markets, and discusses how the outlook on rates may affect relative opportunity.
Three Observations on Value
Value has become more locked in to economic factors over the last few years, observes Jason Wang, Global Head of Quantitative Research. Any continued resurgence of value strategies will be tied to increased economic certainty and improved global dynamics.
Late Cycle Credit Challenges
Alex Christensen, Associate Portfolio Manager, Multi-Sector Fixed Income, considers the end of the credit cycle and argues that late cycle prognostication may be prone to oversimplification. More intensive analysis can uncover opportunity for investors when the consensus has decided that the credit window is closing.
The Great Recession's Six Continuing Consequences
Colin Moore, Global CIO, discusses the lasting effects that the Great Recession has had on markets and the global economy, and how we have yet to fully emerge from the shadow of the financial crisis.
No Longer Momentum's Moment - Understanding the Risks and Returns
A reversal in the momentum factor has made it clear that investors must stay mindful of the related risks, explains Jason Wang, Global Head of Quantitative Research. The flip side of momentum is the potential for sudden loss, especially in environments with heightened market volatility and economic uncertainty.
Harnessing Income from Equities
Alex Rivas, Analyst, Global Asset Allocation, examines how the current low interest rate environment has opened the door for income-generating equities and evaluates their prospects in periods of rising and falling rates.
It's Not Just Trade: Don't Overlook China's Credit Bubble
China’s massive credit expansion has been overshadowed by trade news argues, Paul Smillie, Senior Investment Analyst. Markets are underpricing a potentially greater systemic risk to the Chinese economy: namely the rapid and worrying expansion of credit in recent years.
Caution or Precaution?
An environment of slow growth and easy money is a tailwind for fixed income, but investors should not throw caution to the wind argues Senior Portfolio Manager, Gene Tannuzzo. Historical parallels may help bond investors set expectations in the second half of the year.
Additional reading: Fixed Income Quarterly Review
Our U.S. Fixed Income Team reviews the 2nd quarter, during which 10-year U.S. Treasury yields fell below 2% and the yield curve inverted. The market has been responding to well-known domestic economic pressures, as well as trade and tariff tensions.
Triumph of the Giants
Has the small-cap factor been arbitraged away? Larger and growthier stocks continued to outperform smaller and cheaper issues in the first half of 2019, and their performance gap, as a group, has reached historically high levels. Jason Wang, Global Head of Quantitative Research, looks at the persistent underperformance of the value factor, as well as the diminishing predictive ability of size as a factor.
5-Year Capital Market Assumptions
Expectations for long-term performance are lower across asset classes, as the trade war and the Federal Reserve's pivot on rates are factored into calculations by the Global Asset Allocation Team. The semi-annual update of capital market return forecasts used in strategic portfolio allocations is now available.
Additional reading: Components of Market Returns
Global Asset Allocation analyst, Alex Rivas, looks at a building blocks approach to decomposing equity and fixed income returns. By evaluating the components of return, a portfolio manager can create forecasting models such as those used in our 5-year capital markets outlook.
ESG and Quantitative Data
Mac Ryerse, Lead Analyst (U.S.) of Responsible Investment discusses an approach to finding actionable insights within a quantitative framework that evaluates financial stewardship and ESG management. By applying a materiality lens — such as that established by the Sustainability Accounting Standards Board (SASB) — investors can focus on the key ESG performance factors.
The Yield Curve as a Leading Indicator*
The Federal Reserve Bank of New York presents their research on using the shape of the yield curve, notably yield curve inversions, as an indicator of economic activity, including their probability of U.S. recession chart*.
Dividends, Buybacks and Quality Value
After a year of record stock buybacks, Portfolio Manager, Scott Davis looks at buybacks, dividends and the ways in which corporations utilize cash to create long-term sustainable value for shareholders.
Structured Fixed Income – Consumers Hold the Line
As governments and corporations added debt to their balance sheets in the years since the financial crisis, U.S. consumers plotted an opposite course, shedding their debt burden over the last ten years. Jason Callan, Senior Portfolio Manager, Head of Structured Assets and Thomas Heuer, Senior Portfolio Manager, talk about the current environment and how the changes in underwriting rules, in addition to consumer delevering, have bolstered the asset class’s credit quality.
What’s Value Got to Do With It? - Q1 Quantitative Market Update
U.S. stocks staged a major comeback in the first quarter, but once again, there was a marked dispersion between growth and value returns. Jason Wang, Global Head of Quantitative Research, considers the current value conundrum and how different approaches to value investing can yield dramatically different results.
Real Estate Investing in an Era of Great Change
What happens when no one wants a building by a highway? Bryan Sanchez, Chief Investment Officer, Lionstone Investments, discusses the challenges of late-cycle real estate investment, property obsolescence and the importance of a data-driven approach.
Finding Insights in the Flood of ESG Data
How should investors handle the flood of ESG data? Mac Ryerse, Lead Analyst (U.S.) of Responsible Investment and Kirk Moore, Global Head of Research, sat down with Pensions and Investments to discuss an approach to finding actionable insights amid the wealth of available ESG data.
The Sensitivity of Long-Term Interest Rates: A Tale of Two Frequencies*
David Lucca, Samuel Hanson, and Jonathan Wright at the Federal Reserve Bank of New York, Liberty Street Economics, examine the sensitivity of long-term interest rates to movements in short-term rates and show that this relationship has changed markedly since the year 2000. Their study has implications for the transmission of monetary policy and our understanding of news shocks and their impact on long-term rates.
David Lucca, Samuel Hanson, and Jonathan Wright, “The Sensitivity of Long-Term Interest Rates: A Tale of Two Frequencies,” Federal Reserve Bank of New York Liberty Street Economics (blog), March 4, 2019, https://libertystreeteconomics.newyorkfed.org/2019/03/the-sensitivity-of-long-term-interest-rates-a-tale-of-two-frequencies.html.
The argument that “quantitative easing (QE) was good for the stock market, therefore the opposite must be bad” has an appealing logic says, Anwiti Bahuguna, Head of Multi Asset Strategy, but that argument is wrong. Bahuguna argues that Quantitative Tightening is not the cause of recent market volatility.