Displaying items by tag: macro

Pacific Investment Management Co. (PIMCO) has been quite pessimistic on private credit and sees major downside if rates don’t fall as expected. This is contrary to many in the industry embracing private credit like Blackstone and Apollo Global. 

In contrast, PIMCO is looking to take advantage of the crisis that it’s forecasting. It also has larger implications for the economy and markets given that private credit has taken the bulk of risky lending which used to come from investment banks. 

PIMCO’s thesis rests on the US economy slowing in 2024 and a hard landing in Europe and the UK. If the economy remains resilient, then rates are unlikely to fall as much as expected. This would put stress on private markets where there is less transparency and price discovery. The firm believes that many borrowers are quite risky and quite exposed to a decline in revenues. They believe that about a quarter of private credit portfolios could face difficulties if rates don’t fall or are less than expected. 

PIMCO spies an opportunity if private lenders face pressure from its creditors based on portfolio values dropping. This would allow PIMCO to squeeze out other lenders by buying into debt at a discount. It would also continue a trend of the firm moving away from its roots of fixed income investing and increasingly into alternative assets. This segment has grown from $32 billion in 2016 to $170 billion in the first half of 2023. 

Finsum: PIMCO is bearish on private credit due to concerns about balance sheet risk with risky borrowers, bearishness on the economy in 2024, and the market pre-emptively pricing in a dovish Fed.

Natixis Investment Managers issued its outlook for 2024. It notes that cash levels are higher than normal due to volatility and uncertainty. However, it does believe that some of this cash will be put to work in model portfolios. 

Overall, it sees uncertainty continuing given a tense geopolitical situation in multiple parts of the world, an upcoming presidential election, and the risk that the economy stumbles into a recession. But these conditions are positive for fixed income given attractive yields, falling inflation, a more accommodative Federal Reserve, and equity valuations which are once again getting expensive. 

According to Marina Gross, the head of Natixis Investment Managers Solutions, model portfolios are one of the biggest trends in wealth management. She notes that “Firms are looking to provide a more consistent investment experience for clients in an increasingly complex market, advisors are looking to grow their practices and know clients want more than an allocation plan, and clients are looking for broader more comprehensive relationships with their advisors. Models offer a solution that fits the bill for each in 2024 and beyond.” 

Model portfolios are particularly suited for the current environment as they help manage risk and increase the chance that clients will stick to their financial plan through market turbulence. For advisors, it leads to more confident clients while freeing up time for revenue-generating and business-building efforts.  

Finsum: Natixis is forecasting that model portfolios will continue to gain traction in 2024. Given high levels of uncertainty, model portfolios are particularly useful for advisors and clients. . 

Hazelview Investments shared its bullish outlook for real estate investment trusts (REITs) in 2024. The firm sees gains in the fourth quarter of last year continuing due to earnings strength and relatively low amounts of real estate supply which should support prices. It also sees upside due to attractive valuations, 

It does see the economy slowing in the coming year but this should be offset by easing interest rates and the sector’s strong, underlying fundamentals. In addition, Hazelview points out that historically REITs have delivered their strongest performance during the interim period in between the Fed changing course on monetary policy from hikes to cuts. 

According to Corrado Russo, managing partner and head of Global Securities at Hazelview Investments, "The shifting tides of economic and monetary conditions, coupled with compelling valuations, create a canvas for strong performance in the REIT market in 2024." 

In terms of earnings, the firm sees a 10% increase next year on a cumulative basis. It also anticipates a decline in available supply given that construction has slowed to a crawl over the last 2 years given higher construction and financing costs. At the same time, demand has seen little indication of slowing. 

Finsum: Hazelview Investments is bullish on REITs for 2024 due to attractive valuations, strong underlying fundamentals, double-digit earnings growth, and improving monetary and economic conditions.

2023 saw many twists and turns in financial markets. Yet, one enduring trend was the growth of active and fixed income ETFs as measured by inflows and new ETF launches. Andres Rincon, the Head of ETF Sales and Strategy at TD Securities, shares why this was the case and what’s next for 2024.

A major factor is that mutual funds had net outflows, while ETFs had nearly an equivalent amount of inflows. This is an indication of a secular shift as investors and institutions increasingly favor ETFs due to more liquidity and transparency. In response, many asset managers are now converting fixed income mutual funds into active ETFs or offer dual versions.

Fixed income ETFs also benefited from yields being at their highest level in decades in addition to an uncertain economic outlook. Despite the rally in fixed income in the last couple of months of 2023, Rincon notes that investors had been positioning themselves for a downturn in the economy and pivot in Fed policy starting early in the year. 

Flows into active fixed income ETFs have also been strong, given that fixed income is more complex than equities. This is despite these ETFs typically having higher fees. Yet, active managers are able to take advantage of inefficiencies that are unavailable to passive funds. And, active is a particularly good fit for the current moment when there is indecision about the timing and extent of the Fed’s next move.

Finsum: TD’s Andres Rincon discusses what drove the surge of inflows into fixed income and active ETFs last year. And, why these trends should continue in 2024. 

There’s a major drawback to today’s hyper-connected world where investors are constantly receiving financial advice that is mostly short-term and doesn’t necessarily have the investors’ best interests in mind. Contrast that approach to a long-term, fundamental based approach that is based on timeless principles rather than impulsive thinking.

Recently, there has been a narrative that individuals should be buying individual bonds. Adam Abbas, a portfolio manager at Oakmark Funds, pushed back against this notion and made the case for why most investors are better off with mutual funds and ETFs. 

He acknowledges that bonds look very appealing given where rates are relative to historic levels and that default rates for high-quality securities are likely to remain low. However, the risk climbs when investors start ‘reaching for yield’ which tends to happen with individual investors. Therefore, some sort of comprehensive credit analysis is required from a bottom-up perspective. 

Further, most individual investors will not be able to sufficiently diversify their portfolios. This means that their portfolios would be damaged by a corporate bond default. In addition to understanding companies, investors also need to have a grasp on the macro picture as factors like inflation or rate policy can also impact returns. 

Given these difficulties, most investors are better off choosing an astute active manager to invest in bonds as they will conduct proper due diligence and ensure that portfolios are sufficiently diversified. 

Finsum: There’s a trend of individual investors buying individual bonds. Oakmark’s Adam Abbas pushes back against this and makes the case for why most investors are better off with a mutual fund or ETF.