CC-BY-SA-2.0, FlickrTom Ross, gestor de fondos de renta fija en Henderson Global Investors. Descendiendo por el espectro del crédito
From a top down perspective we expect spread compression to continue, i.e. a reduction in the yield that corporate bonds offer over corresponding risk-free bonds. This is likely to be driven by ‘lower for longer’ interest rates, especially in Europe where the European Central Bank appears to be taking a more dovish stance and diverging somewhat from the US Federal Reserve. Additionally, declining corporate bond supply in investment grade, particularly amongst financials, continues to create a demand for higher yielding assets further down the credit spectrum
Within high yield bonds – those that are rated sub-investment grade – Moody’s, the credit ratings agency, expects default rates to remain low. The global trailing 12-month default rate for sub-investment grade bonds was 2.8% for the year to October 2013 and Moody’s expects this to fall to 2.4% by October 2014. We share a similarly benign outlook for defaults within high yield and are therefore happy to move down the credit spectrum on a selective basis to pick up incremental spread/yield.
Taking into consideration the value within high yield bonds at the fundamental level, we prefer B/CCC credits relative to BBs for a number of reasons. First, they have fewer call constraints. What do we mean by this? Well, a lot of BB rated bonds are trading at prices that are close to, or in some cases above, the call price (the price at which the issuer has the option to redeem the bond). When an issuer calls in a bond it pays the bondholder the face value of the bond plus accrued interest, so when prevailing yields in the bond market for similar bonds fall below the rate on the callable bond, the issuer has an incentive to redeem the bond early and issue a new one. This can limit capital appreciation for the bondholder. In a world where yield is scarce we are keen to have greater control over the yields we receive.
Second, the issue sizes lower down the credit spectrum are typically much smaller at $200-300m. Since this is too small an issue size for the very large funds there tends to be fewer analysts following these bonds. This can create opportunities for those funds with strong analytical expertise to add value.
Third, there are fewer “tourist” investors in high yield such as exchange traded fund (ETFs) and investment grade funds. Again, this is often a reflection of the smaller size of the issues.
Finally, many of the B and CCC rated companies are new to the high yield market. They have effectively moved from bank loan to bond refinancing and so are less well known. This gives those asset managers with expertise in loans, such as Henderson, an advantage because the loans team who have already been analysing the companies can share their knowledge of a company ahead of a new high yield bond issue.
The above views are expressed within the Henderson Horizon Global High Yield Bond Fund, Henderson Horizon Euro High Yield Bond Fund, and Henderson Credit Alpha Fund, whilst within the investment grade Horizon Euro Corporate Bond Fund we have 8% of an available 20% off-benchmark allowance invested in high yield.
Opinion column by Thomas Ross, fixed income portfolio manager, Henderson Global Investors.
Pixabay CC0 Public Domain. Japan’s “Show Me the Money” Corporate Governance: 3Q update
ING IM highlights that the macroeconomic backdrop globally remains positive with some catch-up recently taking place in Europe and China. Also, the no tapering decision by the Fed in the latter half of 2013 implies a clear growth bias in its reaction function further supporting the recovery process.
Fixed Income
For the reasons above, ING IM maintains a growth bias in its positioning within fixed income and spread products with an allocation that is underweight Treasuries and overweightSpreads. Within spread products, ING IM has a growth tilt in its positioning. ING IM has a firm overweight in High Yield next to a medium overweight in Eurozone Peripheral Treasuries (EPT).
Equities
ING IM foresees that equities will be driven by better earnings fundamentals in 2014 while Europe, Japan and Cylicals are expected to lead the way over the next twelve months.
Patrick Moonen, Senior Equity Strategist, ING IM said: “We expect modest revenue growth with some margin expansion from lowinput costs, especially with regard to labor. Interest and depreciation charges remain low. Share buy backs will be an additional driver for EPS growth. .”
“Over the past year, global capex growth has been on a declining trend due to sluggish economic growth, uncertainty leading to cash hoarding and tight credit conditions. However, now investment intentions and conditions are improving, there is a potential for growth, higher capacity utilization and, as a consequence, profitability.
Turning to key investment themes, ING IM highlights that Europe will benefit from an economic turnaround and strong earnings growth with the most upside set to come from the periphery. This, coupled with the historical discount to the US, high equity risk premium and lower systemic risk means a superior risk/return profile.
With regard to Japan, the investment manager says the region is set to go through a short-term consolidation phase with Bank of Japan temporarily on hold while the Yen remains a dominant driver. However, longer-term prospects are good; borne out by the economic data strength, high earnings growth and a loose monetary policy, which is set to last
In terms of allocation, cyclical sector allocation remains in place considering the improvement in housing markets, labor market and the expected increase in corporate spending. Elsewhere, the stable growth sectors remain underweight as ING IM believes they are still too popular and expensive.
Nordea has been present in Singapore since 1980 offering full-scale corporate banking services to its customers throughout the South East Asian markets, the Indian subcontinent and Australasia. With the setup of a dedicated fund distribution unit, operating out of Singapore, Nordea Asset Management intends to leverage the existing relationships with global wealth managers. Some of which have already signed global agreements with Nordea Asset Management.
For Christophe Girondel, Head of Distribution, this move is another important step in strengthening Nordea Asset Management’s position as a worldwide fund provider. “Global wealth managers expect us to offer services and dedicated support across the globe in their relevant time zone. Going forward they will increasingly seek efficiency in their product selection; for example they will continue to leverage not only in Europe but across the world in all their Private Banking units. Against this background it is vital for us to be present on the ground.”
The new distribution team is headed by Philippe Graffart, Head of Fund Distribution Asia Pacific, who has 15 years of financial industry experience and is also a CFA charterholder. Philippe is supported by Client Relationship Manager Linda Chang Andersson who is fluent in English, Mandarin, Swedish and Taiwanese. As a first step the team will offer Nordea Asset Management’s investment expertise and fund solutions in Singapore and Hong Kong.
“Our goal is to build long-term relationships with our clients” says Christophe Girondel. “We intend to create a sustainable footprint in the region. As a first step the focus will be Singapore and Hong Kong, but we are also exploring possibilities to find partnerships in Taiwan. To fortify our ambitions Philippe is supported by Client Relationship Manager Linda Chang Anderssonfor now.” The new team has only been up and running for a short time but they have quickly gathered speed with great success in their fund manager road shows on European High Yield and US equities, which have already attracted promising net flows
Photo: Twicepix. John Fraser, CEO of UBS Asset Management, Retires after 12 Years on the Role
John Fraser, who has been Chairman and CEO Global Asset Management since 2001, has decided to retire from his CEO role and as a member of UBS’s Group Executive Board, effective 31 December 2013.
This follows a long and distinguished career at UBS and in finance which began in the Australian Treasury and has spanned five decades. His time at UBS began at Swiss Bank Corporation in Australia in 1993. Under his leadership, Global Asset Management has developed from a localized organization into a focused large-scale asset manager with a diversified mix across regions, capabilities and distribution channels. He will assist in the transition and retain his position as Chairman of Global Asset Management.
lrich Koerner, currently Group Chief Operating Officer (COO), will become CEO Global Asset Management, effective 1 January 2014 in addition to his role as CEO Europe Middle East and Africa. As Group COO, he has played an instrumental role in a number of key strategic initiatives. These include the realignment of the Corporate Center, the design and set-up of the firm’s Industrialization Program and UBS’s cost reduction efforts which have delivered several billion Swiss francs in efficiencies since 2009.
Tom Naratil, currently Group Chief Financial Officer (CFO), will also become Group Chief Operating Officer, effective 1 January 2014. The COO function will include Group Technology, Group Operations, Corporate Services and the firm’s Industrialization Program. In addition, the Corporate Development function will move to the CFO area. Tom Naratil has transformed UBS’s Finance organization since taking over in 2011 and has successfully driven UBS’s efforts to strengthen its capital, balance sheet and funding positions.
In addition, also effective 1 January 2014, UBS is making several other changes to its Corporate Center organization. Group Human Resources, Communications & Branding and Group Regulatory Relations & Strategic Initiatives (GRR&SI) will report directly to Sergio P. Ermotti, Group Chief Executive Officer. In order to manage UBS’s compliance, conduct and operational risks in a more integrated and effective way, Compliance and Operational Risk Control will be merged to form a new function reporting to Philip Lofts, Group Chief Risk Officer. The new function will continue to work closely with Legal, led by General Counsel Markus Diethelm, given the complementary mandates of both organizations. In addition, UBS’s Group Security Services function will also move to the Group Chief Risk Officer area.
Sergio P. Ermotti, Group Chief Executive Officer commented, “I would like to thank John Fraser for the lasting contribution he has made as a leader, an executive board member and a colleague over the last 20 years. As we enter the next phase of our strategic transformation, I know I can draw on the proven leadership of my colleagues on the Group Executive Board to continue effectively executing on our plans.”
Brazil’s economy contracted by 0.5% in the three months to September, down from a 1.8% expansion in the second quarter. This translates to a growth rate of 2.2% year-on-year, versus 3.3% growth in Q2. The Q3 GDP results were worse than consensusexpectations and are likely to deepen concerns of a possible debt rating downgrade for the sovereign.
The decline in output was led by the agricultural sector, which dropped from a 11.6% year-on-year expansion in Q2 to a contraction of 0.97% in Q3. Output from the manufacturing and construction sectors were also weaker, driving an overall decline in industry. On the expenditure side, consumer spending held up well, while investment and exports weakened, and imports climbed strongly.
The figures are a worry for a number of reasons. Against a backdrop of a weaker currency, net exports should be increasing, not decreasing.Yet in contrast with India, the depreciation of the Brazilian real, occasioned by worries of quantitative easing tapering in the US, has not resulted in the macroeconomic adjustment we would expect. Secondly, the economy continues to be propped up by consumption and fiscal stimulus (government expenditures grew 2.3% year-on-year, up from 0.8% the previous quarter). But with a fiscal deficit of 3.2% of GDP anda consumer debt service ratio of 21%, the scope for this to continue seems limited.
The government risks a ratings downgrade, particularly nowthat revenues will be even lower-than-expected. Indeed, with elections in October, fiscal restraint appears unlikely, and so we expect a downgradewithin 12 months. Finally, the poor growth data increases pressure on the central bank to end its interest rate hiking cycle, despite an ongoing problem with high inflation and inflation expectations, which has been exacerbated by the weak real.
There is no silver bullet for Brazil’s current mess. High inflation and weak growth limit the scope for loose fiscal or monetary policy as effectiveremedies. The medicine the economy needs most of all is structural reform to address the many supply side bottlenecks and to incentives newinvestment. Unfortunately, we suspect that action on this front is unlikely ahead of October’s elections. Growth should benefit somewhat froma recovery in developed markets next year, while inflation should ease on lower commodity prices. But if Brazil does not reduce its dependenceon consumption and fiscal populism, stagflation could become the norm, which the markets will punish.
CC-BY-SA-2.0, FlickrFoto: arvind grover. Los mercados frontera en Asia alcanzan su punto demográfico ideal
The age demographics of Asia’s frontier markets are another indicator that they are poised for growth. Over the long term, GDP growth rates are generally determined by increases in the size of the labor force, capital accumulation and technology. Measured by the increase in the labor force and the favorable age profile of their populations, the frontier markets are in a demographic sweet spot.
In Cambodia, Laos, the Philippines, Bangladesh and Pakistan, one person in five is between 15 and 24 years of age. The median age in these countries is 25 or under, compared to over 34 in Japan, South Korea, Thailand and China. If people hit their productive peak at around 40, the younger countries stand to see steady productivity gains over the next 20 years.
Between 2010 and 2020, the labor force is projected to grow the most in Laos (37%), Pakistan (35%), Cambodia (31%), Bangladesh (29%) and the Philippines (25%). In India and Vietnam, the labor force is expected to expand by 20%. In contrast, the labor force is projected to shrink in Japan and South Korea. Between an increased labor force and the potential for increased productivity, frontier countries may well outstrip their counterparts in GDP growth.
Favorable demographics alone, however, are not sufficient to drive growth. Countries must be able to gainfully employ people entering the workforce, which drives earnings, savings and investment. This is where capital accumulation comes into the equation. Strong institutions, infrastructure and foreign direct investment (FDI) policies must be in place for a country to accumulate capital, either through domestic savings or foreign investment. Large-scale job creation requires active labor market policies and vocational training. Frontier markets would do well to emulate some of the successes of their East Asian and more developed Southeast Asian peers.
Another effect of relative youth combined with labor force growth is the “remittance dividend.” When a frontier economy cannot fully employ its workforce, large numbers of workers migrate to countries with stronger economies. They then send money back home to help support their families, which helps stimulate the economies of their native countries. Indeed, in certain situations, remittance flows to frontier markets can contribute substantially to their economies, varying between 1% of GDP in Indonesia to about 11% of GDP in the Philippines and Bangladesh.
Overall, the “demographic dividend” is expected to add 1.5% to annual GDP growth in Vietnam, 1.1% in Pakistan and 1% in India between 2011 and 2020.
Foto: Robin Müller. Backing the Right Horse: Equities Set to Rise Further in 2014
Equities are set to rise further in 2014 after the world returns to normality, with higher global growth and the end of easy money in the US. These are the key predictions of Robeco’s Chief Economist Léon Cornelissen in his outlook for markets next year.
Favorable climate for higher-risk investments
Stocks are Robeco’s preferred asset class for 2014, although returns may not be as strong as in 2013, when the MSCI World Index rose almost 16% in the first 10 months of the year in euros on the back of stimulus from quantitative easing (QE) programs.
“2014 will be a year in which higher-risk investment categories will provide satisfactory returns,” says Cornelissen. “Expanding global growth combined with continuing loose monetary policy favors higher-risk asset classes.”
High-yield bonds are favored in the fixed income sphere, as the end of QE – beginning with tapering by the US Federal Reserve (Fed) expected from the Spring – signals a new era of rising interest rates. This makes the returns on high-yield debt relatively more attractive than those available on sovereign bonds.
‘Less emphasis on austerity will support recovery in the Eurozone’
Politics will be the unpredictable part
However some political risk remains. The Eurozone has come a long way since the height of the euro crisis in 2011, with growth expected to rise towards 1% in 2014. “Less emphasis on austerity will support recovery in the Eurozone”, says Cornelissen. “This will mean that earlier deficit targets will again not be achieved.”
“It is nonetheless very unlikely that the European Commission will impose fines on miscreant nations; just as unlikely is a fine for Germany because of its continuing excessive current account surplus. Although in theory the Commission’s powers for achieving a more centrally directed budget policy have increased greatly in recent years, these will still turn out to be a paper tiger in practice, due to the lack of political support. The outcome of the European parliamentary elections in May 2014 will be an unsurprising but still unpleasant confirmation of this lack of support”, says Cornelissen.
The US also faces the potential wrath of voters after the world’s largest economy only averted debt default when the government was shut down amid wrangling over raising the debt ceiling. US Congressional elections will take place in November, potentially dislodging those Republicans who had opposed Democrat President Barack Obama during the shutdown.
Three scenarios for quantitative easing
With regard to quantitative easing, there are three different scenarios, with differing likely outcomes. “Quantitative easing will come to an end in the US, will probably not start in Europe, and will be expanded in Japan,” says Cornelissen. He predicts that tapering the Fed’s QE program will cut the value of government bonds purchased from USD 85 billion a month to zero over a period of six to nine months from March or April. “Limited long-term interest rate rises in the Eurozone and the US are likely, but this will probably not happen in Japan because of financial repression,” Cornelissen says.
That is because the extraordinary Japanese economic experiment known as ‘Abenomics’, in which Prime Minister Shinzo Abe has combined QE with an assault on deflation and a pledge for structural reform, faces its biggest test next year. VAT will be raised by three percentage points in April to encourage greater spending in the first quarter, thereby averting deflation. But it runs the risk of triggering a recession similar to the one that followed the last VAT-rise experiment in 1997.
In the long-embattled Eurozone, Cornelissen expects “moderate economic recovery”, eventually rising above 1.0% a year. However, the chief economist warns: “Positive investment growth is also necessary to achieve recovery in the region. And it is necessary to control political tensions for this recovery to work.”
Japan GDP Growth Rate Figure 1: The Japanese VAT hike risks putting the country back into recession. Source: www.tradingeconomics.com | The Cabinet Office.
Mixed bag for emerging markets
Globally, Cornelissen expects “moderately increased growth in the developed economies outside Japan”, but the picture for emerging markets is expected to be mixed.
“China will slow down to some extent, while other emerging markets will speed up to a limited degree”, says Cornelissen. “Accelerated Chinese growth is not sustainable and the authorities are again taking the path of monetary tightening. All in all, we are counting on growth in the order of 6.0% against 7.5% in 2013”.
“Because of the economic recovery in the developed world, we believe there is a plausible case for limited recovery in Brazil (where there are also elections in 2014), India and Russia.”
Earnings will be key to success for stocks
“Overall, the macroeconomic climate will be more favorable for stocks in 2014 than in 2013,” he says. “Gradual interest rate rises in a low-interest rate climate are a positive signal that the US economy is in principle strong enough to support corporate profits by increasing consumption and investments. But earnings will be the key to success in 2014.” Figure 2: Profit margins have steadily risen for US companies since 2009. Source: Bloomberg / Robeco.
Equity price rises in 2013 were mostly driven by stocks achieving higher multiples – a company’s share price divided by its earnings per share – as both profits and business sentiment generally improved due to stimulus from QE. This may not be repeated next year when QE begins to be withdrawn, Cornelissen warns.
“We expect to see a more gradual expansion of price/earnings ratios, modest profit growth and somewhat greater market volatility,” he says. “These factors will make it difficult for stocks to equal or exceed their excellent 2013 performance in 2014.”
Bond yields will gradually rise
In fixed income, high-yield bonds are preferred. “Low interest-rate policies in recent years have given businesses sufficient opportunities to issue longer-term bonds at favorable rates,” says Cornelissen. “Still, we note that this asset class is losing some of its glamour. The reward for credit risk has dropped to 450 basis points and therefore lies below the 10-year average of 610 basis points.”
For emerging market debt, the current return on credit risk is 500 basis points. While this is 50 basis points higher than the equivalent return on high-yield corporate bonds with a similar duration, Cornelissen does not believe it will compensate for the significant currency risk seen in 2014. This is due to emerging markets currencies continuing to devalue against the US dollar as they struggle with economic growth.
“As emerging markets catch up economically, the current undervaluation of currencies (at this time over 40% based on purchasing power parity) will gradually translate into currency profits and offer solid returns on emerging market bonds in the longer term,” Cornelissen says.
For sovereign bonds, the Fed’s tapering plans mean higher yields – and bond values falling in tandem – as interest rates gradually rise.
“Both US and German government bonds are approximately 100 basis points lower than one would expect due to money market interest rates, inflation and growth prospects,” says Cornelissen. “We expect that bond yields will gradually increase during 2014 towards the levels that would be appropriate with further increasing economic growth”.
John Calamos. Calamos AM will Allow Senior Portfolio Management and Executives to Participate in Ownership of the Firm
Calamos Asset Management announced lasr Wednesday that Nick Calamos, aged 52, is leaving the Calamos Board of Directors to further pursue his interests in education and philanthropy. The move follows his decision to step away from his day-to-day role with the firm in August 2012 and his agreement to sell to John P. Calamos, Sr., aged 73, his private interest in Calamos Family Partners. The separation agreement includes non-compete and non-solicitation provisions which extend for a period of four years following Nick’s departure.
As a result of this transaction, John P. Calamos, Sr., Chief Executive Officer and Global Co-Chief Investment Officer of Calamos Investments, has announced his intention to form Calamos Partners, in order to allow senior portfolio management and executives of the firm to participate in the private ownership of Calamos Investments. In discussing the formation of Calamos Partners, he stated, “Over the years, I have sought to align senior portfolio management and executives with the long-term objectives of the firm and interests of our shareholders. Calamos Partners will enable the firm to strengthen its alignments with key talent.”
John P. Calamos, Sr. also said, “We wish Nick the best in his future pursuits. Over the last 18 months we have significantly strengthened the Calamos Board of Directors with the appointments of Global Co-CIO Gary Black, Thomas Eggers, Keith (Kim) Schappert and William Shiebler, all of whom have held the role of CEO at asset management firms.”
He continued, “The firm is well positioned for future growth thanks to the strengthening of our investment team and the expansion of our investment strategies, including alternatives, value and high yield.”
Nick Calamos said, “Now is a good time for me to step down so that I can focus more on my academic and charitable activities. Our new Board members are working very well together. John and Gary have added significant resources to the investment team and investment performance has improved on several key strategies. I know the firm’s future is bright.”
CC-BY-SA-2.0, FlickrXi Jinping, presidente de la República Popular China. Susurros desde China: Rumores y hechos del Tercer Pleno
The Third Plenum, a significant legislative function that brings together every member of the Central Committee to discuss major policy issues, has already been called “unprecedented” by Chinese officials. Investors remain skeptical, taking the cautious stance of awaiting more details of the meeting and its impact before making any decisions.
How Will Investors React?
China analysts are currently combing through the various resolutions adopted by the Plenum, looking for hints to any industries that might benefit from the next round of reforms. There will be various “market implications” reports from different brokerages (e.g. Chart 2), but considering the overall lack of any real surprises within the resolutions, many of the implications have already been priced into the markets, having become expensive, with valuations already outpacing earnings projections. We believe that eventually, when investors realize that even announced improvements will not occur overnight, prices will start dropping. Implicated investors will be caught in the old investment trap: “buy on rumor, sell on fact.”
Regardless of the angle the Party winds up taking with future reforms, we strongly believe that the financial sector will be the first to benefit. Without a healthy banking sector, the rest of China’s reform plans would be much more difficult to achieve. The Chinese government is expected to accelerate interest rate deregulation and facilitate the development of the fixed income market. Due to the success of Shanghai and other cities in issuing bonds last year, we expect to see a more sophisticated development of Chinese municipal bonds. In order to increase transparency, we believe the local governments will be required to release their own balance sheets before issuing their own bonds. This will substantially remove the overhang of high credit risk related to local government lending (aka LGFV risk) within the banking system. Additionally, banks will be able to free up their capital and increase lending to a higher margin of the SME segment at the expense of reducing exposure to the corporate/local government segment, which currently accounts for some 72.3% of total bank loans.
Furthermore, another important financial reform-oriented message was the intention to establish a government bond yield curve which will better reflect market supply and demand. This should imply a higher yield for RMB long-dated bonds, benefitting local insurance companies.
At current valuations, Chinese banks have priced in high credit cost for fear of LGFV risk and rising NPL. We believe the new government policy of allowing local governments to issue bonds will serve as a catalyst for a significant re-rating of China’s currently undervalued and under-owned banking sector. Other non-bank financials (e.g. insurance companies and brokers) should also benefit in view of anticipated development in the fixed income market.
Looking forward, we remain very positive on China’s investment outlook. The country offers an attractive GDP growth of over 7%; growth we believe to be sustainable given the positive messages from the Third Plenum. In addition, the lack of inflationary pressure (CPI is forecast to be 3.5% in 20143) and the development of fixed income markets should all benefit overall financial reform. There have been some signs pointing to the return of business confidence as per the PWC Asia Pacific 2013 CEO survey (see Chart 3) which shows that 68% of 478 Multinational Corporations are planning to increase their investment in Asia next year.
Five years after being roiled by the onset of a financial crisis, the global investment environment appears to be approaching an inflection point. This view was discussed by T. Rowe Price investment professionals who shared their thoughts at the company’s annual Investment and Economic Outlook press briefing in New York City on December 3rd
The briefing’s overriding theme for 2014: Be careful. Many financial markets around the world have been in bull market territory since the nadir of the crisis in March 2009. U.S. stocks are up more than 160% off of their lows in 2009, while non-U.S. stocks are up more than 107%. For most of this time, markets have climbed a “wall of worry” and many investors stayed on the sidelines. Recently, however, money has begun to move into riskier asset classes. While attractive investing opportunities continue to exist in many global financial markets, T. Rowe Price believes that investors should temper their expectations as the strong performance in many of these markets over the last five years is unlikely to be matched during the next five years.
Investment and Economic Observations
The U.S. economy and many other economies around the world are poised to gain traction in 2014, albeit in a slower-growth mode than they enjoyed before the crisis began. Tapering from the U.S. Federal Reserve is coming in the next three to six months, and could lead to volatile conditions in global equity and fixed income markets. With unemployment still high in the U.S. and inflation pressures muted, the pace of monetary policy adjustment is likely to be gradual.
Alan Levenson, Chief Economist stated:“The economy should gain momentum next year, with housing construction likely to pick up. The impact of political uncertainty in Washington should be less than it was this year, once we get past the January sequestration talks and the focus turns to elections.”
Despite the bull market, equity valuations appear to be reasonable overall. On the international equity front, many developed markets are seeing improving fundamentals. Europe’s economic recovery is still in its early stages, which could give European stocks more room to run than their U.S. counterparts. In Japan, government reform efforts have the potential to pull the moribund economy from its chronic slump, but structural challenges remain, including ineffective corporate governance and dated labor and regulatory rules. In emerging markets, equity valuations appear to be inexpensive relative to historical norms.
Bill Stromberg, Head of Equityexpressed: “Confidence has been restored, but it is important to be vigilant as the U.S. bull market is aging. International investments, especially in emerging markets, represent the best long-term value from here in fixed income and equity.”
John Linehan, Head of U.S. Equity, shared a similar message, highlighting his doubts over the US market rally: “Moving forward, U.S. stocks are unlikely to match their recent strength. This bull market has lasted for 57 months so far, which is the average length of bull markets since 1930. On the plus side, corporate health remains strong and valuations are neutral. There are still attractive areas, such as companies that are benefiting from the reindustrialization of America. Market tailwinds and headwinds are now more balanced, so we believe it’s time to be cautious.” On the other hand Dean Tenerelli, portfolio manager of the T. Rowe Price European Stock Fund was more positive on his asset class”European equities are undervalued and the economies are recovering. Luxury goods companies, banks in consolidated markets, broadcasters, and Spanish utilities are a few examples of where we see opportunity.
Global fixed income markets are vulnerable to interest rate increases, but value can still be found in certain pockets, including emerging market debt. Credit fundamentals are trending up for many states and municipalities, leading to generally good conditions for U.S. municipal bonds. Moreover, revenues are increasing, due to economic improvement and tax rate hikes, while budget gaps are shrinking. T. Rowe Price favors revenue-backed municipal bonds, especially in areas such as public utilities, transportation authorities, and hospital systems, all of which have limited regional competition and essentially operate as monopolies.
Mike Gitlin, Head of Fixed Income thinks that “Opportunities still exist. The market for emerging market local bonds is relatively liquid and offers attractive risk/reward characteristics. Bank loans and high yield bonds have low expected default rates, strong credit fundamentals, and reasonable yields.”
