What are the key themes likely to shape markets in 2019?
The number of interest rate hikes the Fed pursues will have substantial impact on global fixed income markets in 2019. The Fed has accomplished its goals of maximum employment and stable prices, and while it will seek to maintain those targets, it does not wish to push the U.S. economy into recession. Given that fiscal stimulus, not monetary policy, is currently sustaining growth, and that the impact of each hike is subject to a multi-month time lag, we could see fewer hikes than the Fed is currently forecasting. Still, uncertainty exists in terms of the variability of outcomes for the U.S. economy, and we are beginning to hear companies express that concern. The unwavering confidence we have seen from management teams since 2015’s mid-cycle correction is fading. As companies weigh the potential economic outcomes, we expect to see more cautious risk taking in 2019 and less-aggressive earnings forecasts.
Where do you see the most important opportunities and risks within your asset class?
If the Fed pulls back and moderate GDP growth continues, the roughly 7% coupon on high yield looks attractive. However, we are prepared for modest spread widening as investors acknowledge comparatively slower earnings growth versus 2018. Given the rising-rate environment and generally diminishing prospects for spread tightening, short-duration high yield should remain an attractive source of steady income.
Positive trade developments between the U.S. and China could send risk markets to new heights. Given the uncertainty, however, U.S.-centric companies in sectors with deleveraging trends, such as pharmaceuticals and health care, present attractive risk-adjusted opportunities. In our view, deleveraging and favorable supply/ demand dynamics for certain base commodities will ultimately outweigh trade-related volatility for select metals and mining issuers. Copper miners, for example, are set to benefit as the reliance on battery power grows. The consumer and its desire for experiences are also likely to be a source of opportunity as relatively large tax refunds should spur spending in the first half of the year.
How have your experiences in 2018 shifted your approach or outlook for 2019?
2018 highlighted the importance of blending bottom-up, fundamental security selection with a structured top-down view. The Fed is actively tightening, the economic and credit cycles are in extended innings, and volatility is returning to markets. As we monitor the signals flashing from these and other macro factors, we must maintain the discipline to shift our allocation when asset classes become more or less attractive. A nimble approach, in which we can dynamically allocate to the team’s best ideas in areas of the market with the strongest risk-adjusted prospects, should help us to dampen portfolio volatility and better weather any storms that may arise.
Search for Income
“Uncertainty exists in terms of the variability of outcomes for the U.S. economy, and we are beginning to hear companies express that concern. The unwavering confidence we have seen from management teams since 2015’s mid-cycle correction is fading.” – Seth Meyer, CFA, Portfolio Manager
This dynamic, multi-sector income fund seeks high, consistent income with lower volatility than a dedicated high-yield strategy. Our approach leverages a bottom-up, fundamentally driven process that focuses on identifying the best risk- adjusted opportunities across fixed income sectors.
What else do our experts see for the year ahead?
Strategic Fixed Income: End of the Cycle… Are We There Yet?
With the markets finally coming around to the idea of the late-cycle stage in economies, Jenna Barnard and John Pattullo, Co-Heads of Strategic Fixed Income, expand on the risks and opportunities likely to arise from this theme in 2019.
Going Global to Expand Income Potential
Co-Head of Global Bonds Nick Maroutsos explains why – despite the Fed’s history of dovishness – higher U.S. interest rates are likely here to stay and why bond investors need to react accordingly by taking measures such as looking globally for the most attractive risk-adjusted income opportunities.