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The short answer is no. While it’s a legitimate question (and one we’ve gotten quite accustomed to hearing), the reality is that both equity and fixed income market participants are often drawn to “cheap” assets by the allure of enhanced excess return potential. Here is some of my team’s latest thinking on value investing and why we think it’s relevant in credit markets.
For years, many fixed income investors have adhered to pretty loose definitions of what constitutes an overvalued (“expensive”) or undervalued (“cheap”) credit asset, typically based on whether its option-adjusted-spread is wide or tight versus a given risk-free asset (e.g., US Treasuries).
Our investment framework goes a step further with a more nuanced approach to the notion of “value” in corporate credit markets. We follow a…
The widespread economic fallout from the COVID-19 crisis dealt a formidable challenge to many municipal bond issuers’ ability to maintain and improve their credit quality. Given the need for state-level lockdowns and the subsequent realization that a return to pre-pandemic activity would take much longer than anticipated, the outlook as of mid-2020 pointed to an extremely trying period for the municipal bond market.
However, a combination of factors came together over the course of the year that led to more benign conditions than initially feared and set the stage for many better-than-expected credit outcomes. While some municipal credits have been downgraded since the pandemic began, most have…
Broadly speaking, as of this writing, we believe municipal bond (muni) valuations may offer an attractive entry point for discerning investors. As of December 2020, municipal credit spreads had yet to make up for ground lost to the COVID-19 sell-off earlier in the year (Figure 1). Lower expected 2021 tax-exempt supply and strong retail demand suggest there is room for further spread tightening.
Having said that, challenges remain. Fundamentals in some areas of the muni market continue to be tested by the COVID-induced economic slowdown. Accordingly, deep credit research remains critical in this space. Let’s take a closer look on a sector-by-sector basis.
2020: Lessons learned
Near term, our view on the high-yield market remains that a neutral-to-slightly cautious risk posture, with a heavy focus on security selection, is warranted amid spiking COVID numbers, the US political transition, the waning effects of government stimulus, and credit spreads having tightened from earlier this year. Longer term, however, our outlook is more positive as we see plenty of reasons to be optimistic as we look out nine to 12 months from now.
Remarkable, painful, unsettling, hopeful… 2020 brought a roller-coaster ride of emotions, not to mention its share of economic and market volatility. So, with the US elections pretty much behind us, further US fiscal stimulus on hold (for now), and COVID cases spiking in the US and Europe (but with progress toward a vaccine), what’s our investment thesis for 2021?
Over our 12-month horizon, the promise of more good news on the vaccine front, along with gradually reopening economies and strong government policy support, make us more confident that we’ll begin to see the global economy recover from still-depressed levels. We believe the improving economic backdrop and the prospect of a safe, effective vaccine should be catalysts for a turning point in the market narrative — a broad, durable rotation from growth assets into their value counterparts. This could well be an enduring theme going forward.
We expect a range of value-type equity exposures to outperform in 2021, including overseas developed markets (Europe and Japan versus the US), emerging markets, smaller-cap stocks, and cyclical sectors (such as financials) versus growth sectors. In addition to financials, sectors we find attractive include…
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