strange things happen when you drive with two feet · 2018-02-09 · 4 asset class returns 2017...
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1
Strange Things Happen When You Drive with Two Feet
AAM’s Investment Outlook Webinar
Wednesday, February 7, 2018
2
Today’s Presenters:
Macroeconomic Review and Outlook
Marco Bravo, CFASenior Portfolio Manager
Market Outlook
Reed J. Nuttall, CFAChief Investment Officer
Corporate Securities
Elizabeth Henderson, CFADirector of Corporate Credit
High Yield Sector
Scott A. Skowronski, CFASenior Portfolio Manager
Structured Products
Scott A. Edwards, CFADirector of Structured Products
Municipal Market
Gregory A. Bell, CFA, CPADirector of Municipal Products and Municipal Bond Trader
Convertible Market Overview
Tim Senechalle, CFASenior Portfolio Manager
3
Market Outlook
Reed J. Nuttall, CFAChief Investment Officer
4
Asset Class Returns
2017 Returns by Asset Class
Investment Grade
Bloomberg Barclays US Aggregate 3.07%
Treasuries 2.31%
Corporates 6.42%
CMBS 3.35%
MBS 2.47%
Tax Exempt Municipals 5.45%
Surplus Growth
High Yield 7.48%
US Equities 20.48%
Convertibles 21.54%
Source: Bloomberg Barclays Index Series, S&P 500, Barclays Global High Yield Index, V0A0 (Merrill Lynch US Convertibles Ex-Mandatory)
5
Treasury Curve Steepness
Source: Bloomberg weekly data
6
Strange Things Happen…
7
Marco Bravo, CFASenior Portfolio Manager
Macroeconomic Review and Outlook
8
GDP Growth
1.2%
3.1%
3.2%
2.6% 2.5% 2.6% 2.5% 2.5%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Q1' 17 Q2' 17 Q3' 17 Q4' 17 Q1' 18(est) Q2' 18(est) Q3' 18(est) Q4' 18(est)
QoQ
% S
AA
RContribution to GDP Growth
Personal Consumption Fixed Private Investment Net Exports
Government Spending Real GDP
Source: Bureaus of Economic Analysis, Bloomberg
9
ISM Manufacturing Index
40
45
50
55
60
651
2/1
/20
12
2/1
/20
13
4/1
/20
13
6/1
/20
13
8/1
/20
13
10
/1/2
01
3
12
/1/2
01
3
2/1
/20
14
4/1
/20
14
6/1
/20
14
8/1
/20
14
10
/1/2
01
4
12
/1/2
01
4
2/1
/20
15
4/1
/20
15
6/1
/20
15
8/1
/20
15
10
/1/2
01
5
12
/1/2
01
5
2/1
/20
16
4/1
/20
16
6/1
/20
16
8/1
/20
16
10
/1/2
01
6
12
/1/2
01
6
2/1
/20
17
4/1
/20
17
6/1
/20
17
8/1
/20
17
10
/1/2
01
7
12
/1/2
01
7
Index Level
Source: Institute for Supply Management, Bloomberg
10
NFIB Small Business Optimism
Source: National Federation of Independent Businesses, Bloomberg
80
85
90
95
100
105
1101
2/1
/20
12
2/1
/20
13
4/1
/20
13
6/1
/20
13
8/1
/20
13
10
/1/2
01
3
12
/1/2
01
3
2/1
/20
14
4/1
/20
14
6/1
/20
14
8/1
/20
14
10
/1/2
01
4
12
/1/2
01
4
2/1
/20
15
4/1
/20
15
6/1
/20
15
8/1
/20
15
10
/1/2
01
5
12
/1/2
01
5
2/1
/20
16
4/1
/20
16
6/1
/20
16
8/1
/20
16
10
/1/2
01
6
12
/1/2
01
6
2/1
/20
17
4/1
/20
17
6/1
/20
17
8/1
/20
17
10
/1/2
01
7
12
/1/2
01
7
Index Level
11
Consumer Confidence
40
50
60
70
80
90
100
110
120
130
1401
2/1
/20
12
2/1
/20
13
4/1
/20
13
6/1
/20
13
8/1
/20
13
10
/1/2
01
3
12
/1/2
01
3
2/1
/20
14
4/1
/20
14
6/1
/20
14
8/1
/20
14
10
/1/2
01
4
12
/1/2
01
4
2/1
/20
15
4/1
/20
15
6/1
/20
15
8/1
/20
15
10
/1/2
01
5
12
/1/2
01
5
2/1
/20
16
4/1
/20
16
6/1
/20
16
8/1
/20
16
10
/1/2
01
6
12
/1/2
01
6
2/1
/20
17
4/1
/20
17
6/1
/20
17
8/1
/20
17
10
/1/2
01
7
12
/1/2
01
7
Index Level
Source: Conference Board, Bloomberg
12
Average Hourly Earnings
Source: Bureau of Labor Statistics, Bloomberg
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
2.80
3.0012
/1/2
012
2/1/
2013
4/1/
2013
6/1/
2013
8/1/
2013
10/1
/201
312
/1/2
013
2/1/
2014
4/1/
2014
6/1/
2014
8/1/
2014
10/1
/201
412
/1/2
014
2/1/
2015
4/1/
2015
6/1/
2015
8/1/
2015
10/1
/201
512
/1/2
015
2/1/
2016
4/1/
2016
6/1/
2016
8/1/
2016
10/1
/201
612
/1/2
016
2/1/
2017
4/1/
2017
6/1/
2017
8/1/
2017
10/1
/201
712
/1/2
017
YoY %
13
10 Year Inflation Expectations
Source: US Treasury, Bloomberg.
1
1.2
1.4
1.6
1.8
2
2.21
/1/2
01
6
2/1
/20
16
3/1
/20
16
4/1
/20
16
5/1
/20
16
6/1
/20
16
7/1
/20
16
8/1
/20
16
9/1
/20
16
10
/1/2
01
6
11
/1/2
01
6
12
/1/2
01
6
1/1
/20
17
2/1
/20
17
3/1
/20
17
4/1
/20
17
5/1
/20
17
6/1
/20
17
7/1
/20
17
8/1
/20
17
9/1
/20
17
10
/1/2
01
7
11
/1/2
01
7
12
/1/2
01
7
1/1
/20
18
2/1
/20
18
Rate (%)
14
Corporate Securities
Elizabeth Henderson, CFADirector of Corporate Credit
15
Corporate Sector
Credit spreads tightened and all sectors contributed in 2017
80
85
90
95
100
105
110
115
120
125
130
1/1
/20
17
2/1
/20
17
3/1
/20
17
4/1
/20
17
5/1
/20
17
6/1
/20
17
7/1
/20
17
8/1
/20
17
9/1
/20
17
10
/1/2
01
7
11
/1/2
01
7
12
/1/2
01
7
1/1
/20
18
Bas
is P
oint
s
U.S. Corporate Investment Grade OAS
Source: AAM, Bloomberg Barclays (as of 2/1/2018) Source: AAM, Bloomberg Barclays as of 12/29/2017
Financials
Energy/ Basic
Materials
Telecom/ Media/Tech
Consumer
Other
Contribution by Sector to IG Corporate
Excess Returns
346 basis points
• Yield curve remains upward sloping
• Fed in tightening mode
• Flattening slowly
• Capital markets are wide open
• IPO, leveraged loans, high yield, emerging markets16
Corporate Sector
• Fewer banks tightening standards
• Indicators indicate stability:
• SLO survey remains favorable (standards are loose)
• Financial Conditions Index trending positively
• Credit Managers Index remains above 50 (expansion)
and trended positively in 2017
Credit cycle indicators remain supportive
30
40
50
60
70
7/1
/2002
3/1
/2003
11
/1/2
003
7/1
/2004
3/1
/2005
11
/1/2
005
7/1
/2006
3/1
/2007
11
/1/2
007
7/1
/2008
3/1
/2009
11
/1/2
009
7/1
/2010
3/1
/2011
11
/1/2
011
7/1
/2012
3/1
/2013
11
/1/2
013
7/1
/2014
3/1
/2015
11
/1/2
015
7/1
/2016
3/1
/2017
11
/1/2
017
NACM US Credit Managers Index
Source: AAM, Barclays, Fed
Source: AAM, Bloomberg as of 12/31/2017
17
Corporate Sector
Modest excess returns expected in 2018
Fundamentals expected to
remain stable
Technicals remain favorable
but expected to soften in
2018
Valuation is not compelling
as spreads are historically
tight
18
Corporate Sector
Modest excess returns expected in 2018, continued
Source: AAM, Bloomberg Barclays (OAS data)
Fundamentals expected to
remain stable
Technicals remain favorable
but expected to soften in
2018
Valuation is not compelling
as spreads are historically
tight
50
150
250
350
450
550
650
11/1
9/2
…
6/1
9/2
004
1/1
9/2
005
8/1
9/2
005
3/1
9/2
006
10/1
9/2
…
5/1
9/2
007
12/1
9/2
…
7/1
9/2
008
2/1
9/2
009
9/1
9/2
009
4/1
9/2
010
11/1
9/2
…
6/1
9/2
011
1/1
9/2
012
8/1
9/2
012
3/1
9/2
013
10/1
9/2
…
5/1
9/2
014
12/1
9/2
…
7/1
9/2
015
2/1
9/2
016
9/1
9/2
016
4/1
9/2
017
11/1
9/2
…
Bas
is P
oint
s
U.S. Corporate Investment Grade OAS
U.S. Corporate Investment Grade -OAS+1 Std dev
-1 Std dev
-
50
100
150
200
250
300
3/1
/200
7
9/1
/200
7
3/1
/200
8
9/1
/200
8
3/1
/200
9
9/1
/200
9
3/1
/201
0
9/1
/201
0
3/1
/201
1
9/1
/201
1
3/1
/201
2
9/1
/201
2
3/1
/201
3
9/1
/201
3
3/1
/201
4
9/1
/201
4
3/1
/201
5
9/1
/201
5
3/1
/201
6
9/1
/201
6
3/1
/201
7
9/1
/201
7
Bas
is P
oint
s
BBB-A Industrial Rating Basis
Basis +1 Std dev -1 Std dev
19
Corporate SectorPrioritize risk adjusted income – Opportunities in Financials
(20) (15) (10)
(5) - 5
10 15 20
bps
Finance – Industrials OASAAM comments:
Financials are fairly valued given outperformance
Prefer domestic banks (money center, legacy bonds), P&C and Life Insurance and insurance brokers
Remain selective in REITs and managed care
Community banks remain interesting but must be selective and disciplined with pricing
Continue to avoid:
Inadequate risk adjusted return
Australian banks Asset managers
ReinsurersSmall REITs
BDCs Broker dealers40
50
60
70
80
90
100
110
120
100%110%120%130%140%150%160%170%180%190%200%
bps
Sub/Senior bank relationships
Sub/Senior bank OAS Sub-sr bank OAS (rhs)
20
Corporate Sector
Source: Bloomberg Barclays, AAM (as of 2/1/2018)
Prioritize risk adjusted income – Opportunities in non-Financials
AAM comments:
BBBs offer more value but must be selective at lower end of quality spectrum especially as spreads have compressed with higher quality
Investment themes:
Technological disruption in TMT: Pros: Semiconductors, Software, Telecom,
Towers Cons: Cable, Hardware, small Media networks
Growth challenged/cost focused: Pros: M&A related new issue funding Cons: Highly rated Consumer Products,
Food/Beverage, Healthcare, IT Services
Balance sheet focused BBB Pharma, Energy, Metals & Mining,
Utilities
Outperform
Metals & Mining
Diversified Manufacturing
Wirelines
Supermarkets PharmaceuticalsTobacco
Independent Energy
Midstream Railroads
Electric Utilities
Natural Gas
Underperform
Healthcare TechnologyIntegrated
Energy
Consumer Products
Food/Beverage Chemicals
AutoCable/Satellite Media
21
High Yield Sector
Scott A. Skowronski, CFASenior Portfolio Manager
22
Long Term High Yield Spreads
Source: ICE Bank of America Merrill Lynch High Yield US High Yield Index
23
Default Rate Expectations Are Lower
Source: JP Morgan, as of November 2017. 2017 blue line - actual default rate, dark line - expected
24
Structured Products
Scott A. Edwards, CFADirector of Structured Products
25
30yr Mortgage Backed Security Spreads
Source: Stifel, Bloomberg
26
Non-Agency Residential Mortgage Backed Securities
Prime Non-Agency 2.0 MBS Spreads (bps)Compared with Agency MBS is attractive
Mortgage-Backed Security (MBS)Issuance ($ billions)
Prime Non-Agency RMBS offer compelling carry versus Agency MBS and are expected to outperform
Limited issuance relative to Agency RMBS provides opportunities for managers who can accumulate meaningful exposure
Credit performance has been excellent in Non-Agency Jumbo 2.0 given stringent mortgage underwriting standards
17 defaults out of 76,426 loans securitized (0.02%) since 2012
As of 1/15/2018Source: JP Morgan
Source: Bank of America Merrill Lynch Securitized Research, SIFMA
27
‘AAA’ CMBS Spreads vs. 10yr ‘A’ Corporate Bonds
Source: Wells Fargo Global Securities
28
Commercial Real Estate Price Appreciation By Sector
Source: Bank of America Merrill Lynch Global Research
29
Municipal Market
Gregory A. Bell, CFA, CPADirector of Municipal Products and Municipal Bond Trader
30
Strong Technicals should Support Relative Valuations
Source: Thomson Reuters Municipal Market Data
New issuance supply expected to reach $330billion, down 24% from 2017
• Substantial drop in refinancing activity will be the largest driver
• Infrastructure-related issuance of $220 Billion expected to be the highest in 8 years
Demand expected to remain strong in rising rate environment
• Very heavy reinvestment flows from call proceeds should be very supportive
• High marginal tax rates should continue to attract retail investors
• Mutual fund redemptions expected to be a drag on demand flows as rates rise
0
50
100
150
200
250
300
350
400
450
500
Tota
l Yea
rly
Issu
ance
(bi
llion
s)
Total Issuance
Total Refundings
New Money Issuance
Estimate Issuance
31
Tax-Adjusted Relative Valuations are Unattractive for Insurers
Source: Bloomberg
32
Convertible Market Overview
Tim Senechalle, CFASenior Portfolio Manager
33
Convertible Market Performance & Sector Distribution
22.22%
21.01%
18.37%
14.71%
14.58%
12.70%
12.21%
11.23%
9.58%
5.34%
-2.62%
-9.48%
-15% -10% -5% 0% 5% 10% 15% 20% 25%
Tech
Cons Disc
Materials
Industrials
Utilities
Transp
Healthcare
Financials
Media
Cons Stap
Telecoms
EnergyYTD
QTD
Consumer Discretionary
6%
Consumer Staples
1%
Energy5%
Financials17%
Health Care17%
Industrials5%
Materials2%
Media5%
Technology35%
Telecommunications2%
Transportation1%
Utilities4%
4th Quarter & 2017 Full Year Performance – By Sector U.S. Convertible Market Sector Breakdown – 12/31/2017
Source: Bank of America Merrill Lynch Global Research, Data as of 12/31/2017
34
U.S. Convertible Issuance – Gross & Net
Source: Barclays Capital Global Research Through 1/31/2018
35
Summary and Questions
36
Summary
Strange Things Happen When You Drive with Two Feet
37
Today’s Presenters:
Macroeconomic Review and Outlook
Marco Bravo, CFASenior Portfolio Manager
Market Outlook
Reed J. Nuttall, CFAChief Investment Officer
Corporate Securities
Elizabeth Henderson, CFADirector of Corporate Credit
High Yield Sector
Scott A. Skowronski, CFASenior Portfolio Manager
Structured Products
Scott A. Edwards, CFADirector of Structured Products
Municipal Market
Gregory A. Bell, CFA, CPADirector of Municipal Products and Municipal Bond Trader
Convertible Market Overview
Tim Senechalle, CFASenior Portfolio Manager
38
Questions
Please enter any questions on the top right hand of your screen
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