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Looking beyond consensus
admin | December 13, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Even though the broad performance or beta of the fixed income market tends to dominate portfolio returns, there is always room to add a little extra. Some of that may come from sector allocation, some from security selection, but more times than not the better decisions on either front come from better information and analysis. The hardest work is to find the potential surprises that might tilt returns above or below consensus. That’s the starting place for excess return, and that’s the ambition of Outlook 2020.
Looking over the work in this issue of APS Portfolio Strategy, a few themes seem to show up across markets:
- Trade competition has become a risk that most markets have to price. Our analysis of the economy anticipates that an easing of US-China tensions will help remove some uncertainty and give a boost to US and global economic growth. In thinking about rates, however, the possible use of trade as an instrument of broader US economic policy could still keep 10-year rates trading below 2% for most of 2020. Trade also figures in our read on Argentina and its prospects for getting out of its current troubles.
- Policy and regulation promise to drive returns across markets. Governments regularly shift risk in large markets with the stroke of a pen, especially in markets for government debt or involving government guarantees. Regulatory risk shows up in this issue for agency MBS and CMBS, in prepayments and emerging markets.
- Corporate leverage is creating risk and opportunity. The headlines on corporate leverage and ‘BBB’ risk have been joined by concerns about the weakest leveraged loans. In our analysis of investment grade corporate debt, risk from LBOs appears, concerns about softer foreign demand for ‘BBB’ debt at current spreads shows up, and in our views on CLOs the differences between broadly syndicated and middle market loans surfaces.
- Central bank policy has stepped back from the front lines. The Fed’s seemingly inevitable march to higher rates framed market consensus in late 2018 but is nowhere to be found for now. The Fed seems definitive on the high bar to a shift in rates next year, and the ECB seems to have limited ammunition for any significant change in monetary policy. The absence of the Fed this year in our outlook is as notable as its presence last year.
All of these risk dimensions land in different ways across markets. Each of our analysts has tried to identify the particular ways investors might be able to turn the impact into investable ideas that stand outside of consensus and then summarize those ideas in quick and easy market overviews—food for thought, and for excess return in 2020.
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