Brighter Horizon

Published on Dec. 18, 2018

Brighter Horizon

In the News:

Overall financial market volatility has been elevated over the past two months. Fixed income returns have been bogged down by the Fed hiking cycle. Investors have become increasingly concerned that Santa will not give them a year end rally. In the latter stages of a bull market, as the Federal Reserve raises interest rates and the yield curve flattens, investor sensitivity to the risk of recession grows markedly. Better news seems to be on the horizon. Last week Barclays released their Global Credit Outlook for 2019 and U.S. investment grade fixed income was their top investment choice of 2019 due to its high “risk-adjusted return.”

The Barclays team states, “Our economic outlook, thus, appears more bond-friendly than it has for many years. Moreover, we find it substantially easier to identify negative risks to our base case than positive ones. A world of single-digit earnings growth, without a recession in sight but with mostly downside risks, naturally brings to mind fixed income assets at the upper end of the quality spectrum. From a total return standpoint, European credit does not fit the bill; total yields are simply too low. That is not true of high-quality US credit products; for the first time in several quarters, we now feel that the risk-reward favors higher credit US fixed income over global equities.” They go on to explain that the U.S. economic backdrop remains stable and most leading indicators still point to robust growth in 2019. “Corporate fundamentals in aggregate also look strong, with net leverage only slightly above its long-term median level, EBITDA margins are at 15-year highs, and interest coverage ratios remain elevated. Further, following the recent spread widening valuations are not especially rich.”

Our Thoughts:

Our approach is to seek to build client portfolios with the most attractive levels of internal cash flows while limiting traditional bond market risks as reasonably as possible. Investment decisions should be based on long term plans and risk tolerance levels. We seek to provide value by filtering out the noise, making reasonable and informed decisions, and diversifying in preparation for volatility. Our Current Income Portfolio is an attractive solution for investors looking for conservative allocations and additional yields in any interest rate environment that also can provide a sustainable and substantial income stream during your clients’ retirement. The foundation of our Current Income Portfolio remains U.S. investment grade fixed income.

Sources: Barclays Global Outlook, Macro Research December 6, 2018

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