Silicon Valley
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“Silicon Valley has disrupted many businesses over the past 10 to 15 years, and the pace of disruption is accelerating. High-quality companies that have built competitive advantages over decades face new challenges to their business models. Gone are the days where size and scale were sufficient to fend off up-and-comers. Traditional businesses need to evolve quickly if they want to remain relevant.”
— Rob Forker, Senior Global Specialist, global opportunities team
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Importance of Cumulative Income
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| “Income provides the vast majority of return in bonds over time, particularly in an environment like this where fixed income valuations are stretched. Having a long-term investment horizon often times allows the compounding effect of income to overcome price volatility. Investors with conviction in their research and security selection may be able to ride out short-term volatility and benefit from the cumulative nature of income over the long term.”
— Brian Kennedy, Portfolio Manager, full discretion team
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State Governments Wrestling With New Challenges
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“Many states had difficulty closing 2017 budget gaps and balancing their fiscal 2018 budgets because of slower tax revenue growth and rising costs—particularly for healthcare and pensions. Uncertainty surrounding federal healthcare, trade and tax policy only complicated matters. In particular, the loss of promised federal Medicaid funding could seriously hurt states that expanded Medicaid under the Affordable Care Act. Tax reform, if and when enacted, could pose a new host of issues for states already facing significant challenges.”
— Charles Kishpaugh, Senior Credit Research Analyst
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Agency Mortgages
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“If the Fed starts to reduce its balance sheet later this year, I think agency mortgage valuations could improve enough to attract core fixed income investors back to the sector, especially those with underweight positions. Depending on what happens with prices, agencies may be able to lure some investors out of US Treasurys.”
— Chris Harms, Portfolio Manager, relative return team
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Auto Industry Deceleration
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“Total US auto sales remain relatively high compared to history thanks to favorable economic conditions and relatively low gas prices, but the industry continues to show signs of deceleration. Going forward, I expect continued pressure on new car sales due to rising interest rates, a tighter credit environment and weaker trade-in values.”
— Steven Bocamazo, Associate Director of Credit Research
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US Banks
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“Credit trends at US banks are caught in a tug of war; interest margins have improved since the Fed began increasing interest rates, but are being offset by weak loan growth rates. Unresolved healthcare and tax reform developments from Washington have made commercial bank customers, especially small- to medium-sized businesses, hesitant to borrow to expand their operations. US banks are also keeping a close eye on regulatory reform. Nothing has been proposed yet, but easing some current restrictions and reporting requirements could encourage banks to increasing their lending programs. It could also increase balance sheet risks, which is something for credit investors to monitor.”
— Elizabeth Schroeder, Senior Credit Research Analyst
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Global Equities
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“Global equities continue to perform very well this year, even though policy developments out of Washington have done little to boost stocks. The US dollar has been in a broad trading range in recent quarters following a long period of strength. This has been one factor supporting the performance of global equity markets in Europe, Japan and emerging markets. Technology has been a top-performing sector worldwide, and it is lending key support to equity performance in the Pacific region, including China. While the earnings picture for the second half of the year may not be as strong as the first, global earnings are being revised moderately higher, supporting a constructive equity outlook.”
—Richard Skaggs, Senior Equity Strategist
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European Banks
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| "Banks are like tea bags—you can't be sure how strong they are until they're in hot water. Europe is now in the final stages of clearing up its banking system, 10 years after the global financial crisis. This year, three large European banks raised capital while two mid-size banks received bailouts. That's a contrast to the US, where the Fed recently approved capital return by the large banks equivalent to about 100% of their expected earnings over the next year. Should we head into another downturn, I expect that US banks are likely to be more resilient than their European peers for at least the next few years.”
—Julian Wellesley, Senior Analyst, global equity opportunities team
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Media M&A
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"The media and communication industries are on the cusp of significant realignment driven by changing consumer preferences and shifting economic returns. Strong cable networks featuring must-have content will likely get stronger by getting into virtual television bundles, while weaker cable networks are likely to get marginalized. Distribution and content convergence, as evidenced by the vertically integrated Time Warner Inc. and AT&T deal, could become a template and catalyst for potential consolidation. I believe there is strategic rationale for large media companies to make scale deals to enhance their technology and distribution capabilities. Apart from gaining a global distribution platform, deals like these would potentially create a platform offering sports, advertising, etc., customized by geography and enabled by a large suite of universal, high-quality content.”
— Amit Kapoor, Senior Equity Analyst
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Subprime Autos — Not a Bubble
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| “There is a lot of headline noise about rising losses in subprime auto lending. However, I believe the securitized subprime ABS market will be just fine—the current deals are adjusting and credit enhancement support has been stable and/or increasing and should be able to withstand moderately increasing defaults. Auto ABS is very different from RMBS—issuers have skin in the game, service the loans, and often take a stake in the deals they originate.”
—Jennifer Thomas, Senior Mortgage and Structured Finance Analyst
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Inflation
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“Unemployment across developed markets is reaching multi-year lows, but wage growth and headline inflation remain below central bankers’ targets. Why? Headline inflation is a function of prices for both goods and services. The fall in commodity prices depressed goods prices globally, dragging headline inflation lower. Now, with downward pressure on goods prices largely over, wage-driven services prices should be the key driver of headline inflation. Tepid growth across many developed economies appears to be related to under-appreciated slack in labor markets. Industries undergoing structural shifts and increased use of temporary and part-time contracts tempers wage growth.”
—Laura Sarlo, Senior Sovereign Analyst
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China
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“I don’t expect debt levels in China to decline any time soon. In the near term, I expect China’s industrial upgrading process will boost debt levels further as productivity gains take time to be realized. Overall, I see China's growth potential continuing to decline in coming years. Old industries will likely mostly muddle along and get culled down over time while new economies like higher-value manufacturing, robotics and healthcare should be competitive, but not enough to lift overall GDP growth.”
— Celeste Tay, Senior Sovereign Analyst
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A Case for TIPS
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“US and global economic growth remains on track to exceed levels recorded in 2016. US inflationary pressures from tightening labor markets and rising healthcare and shelter costs are forecasted to reassert themselves. Resource utilization rates are rising and slack in the labor market has narrowed. A pickup in inflation pressures later this year may create some surprise volatility, along with a correspondingly more aggressive Fed response. I would expect TIPS to help protect portfolio value in such an environment.”
— Peter Palfrey, Portfolio Manager, relative return team
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Agency MBS
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“I expect modestly positive excess returns for agency MBS versus Treasurys over the next 6 to 12 months. The Fed is withdrawing from the MBS market, but I believe reinvestment will continue through summer 2018. Refinancing incentives remain muted and a prepayment wave appears unlikely.“
— Ian Anderson, Portfolio Manager, mortgage and structured finance group
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