Economic and Market Commentary

Finding Resiliency in a Long Recovery

Dan Ivascyn, Group CIO, discusses outlook for the markets, why the road to recovery is likely to be long and bumpy, and the areas of the market where we see resiliency.

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Daniel Ivascyn: In terms of our economic outlook, we do believe we're in the midst of a recovery. Of course, this is coming after one of the largest economic shocks that the US economy has ever gone through. So although we are in the midst of a recovery, unfortunately it's going to be a long recovery. It will be frustratingly slow in some sense.

And to give you a sense, we don't think we get back to late 2019 growth levels until the end of next year at the earliest. And if we do face some unanticipated negative shocks to the economy from here, that ultimate recovery could get pushed even further forward in time. So what this means, of course, is that the worst may be over from a market volatility perspective.

We do expect to see a steady decrease in the unemployment rate, an increase in GDP growth, but it's going to be frustratingly slow. There are going to be segments of the economy, industries out there here in the US as well as other countries around the world, that continue to struggle because this recovery is going to be somewhat sluggish and somewhat uneven. And we know a lot of segments of the economy that have been most impacted by this unfortunate COVID or health-related crisis, they may never fully recover, or at a minimum will need significant ongoing financial support, and in some cases may not avoid restructuring or at least the need for additional capital going forward.

One term we use a lot in thinking about overall portfolio construction is resiliency. And again as uncertain as a macro environment as we're currently operating, capital preservation, resiliency is very, very important.

One area where we continue to see significant resiliency is in the residential mortgage space broadly. And by broadly, I mean not only in this country, but even in other segments of the developed markets as well, with an eye towards Europe in terms of more immediate opportunities.

This is a segment of the market where there's been sufficient conservatism on the underwriting side and sufficiently strong fundamentals where many of these investments continue to perform even in a world of declining home price values in the areas again where we operate; one of our favorite sectors, a sector where we have massive amounts of resources, and an area where we'll continue to look to deploy capital.

Similar story, perhaps with slightly less conviction, in the broad asset-backed categories, particularly consumer-related asset-backed securities, their fundamentals remain relatively strong as well. You do have to differentiate across the subsectors of the market.

But what we like about that space is that in addition to a promise to pay, you have investments that are backed by hard assets, whether that's automobiles in the case of an automobile pool, other types of consumer secured receivables. You do get that added protection. So again, even if you were to get into a much more protracted economic downturn, still the type of resiliency that we're looking within this space.

Then last but not least, the corporate credit opportunity set today, at least on a targeted basis, is as attractive as we've seen in many, many years. Going into late 2019, spreads were quite tight, and it was an environment where borrowers had most of the leverage, very little in the way of covenant protection. A lot of the deals that were coming to market in our opinion had inadequate security packages or covenants. That has all changed over the course of the last few months. So although generic credit beta has rallied a lot, generic IG or investment grade and high yield spreads are looking a little bit less interesting, given the rally that we've seen; there's still a steady stream of opportunities within the corporate credit space, and the opportunity as investors in this space to drive pretty attractive terms for us as lenders.

Disclosure


IMPORTANT NOTICE

Please note that this communication contains the opinions of the manager as of the date created, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice. The Covid-19 Crisis is ongoing and is used for illustration purposes only, and may not be reflective of the current environment.

Past performance is not a guarantee or a reliable indicator of future results.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

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CMR2020-0921-1171145

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