What were the major recent events and impacts on your asset class?
Well, the most significant events of the second quarter were, first of all, the Federal Reserve (Fed) pausing in its interest rate rise program – we think that they're almost done, but not quite, so there'll be a little more left to do to the sticky inflation and more specific to our strategy, the stabilisation of home prices in the United States. Home prices were up again the prior month, which brings them to relatively flat on a 12-month basis and only down about 2% from the absolute peak back in June of 22, which is consistent with what we've been saying and what we continue to think, which is that the rise in rates causes an affordability problem that's going to push prices down slightly. However, there is a tremendous amount of demand, very little supply, and that's going to dominate the medium to long term. And that's why we're seeing the stabilisation after even such a mild decline and we think that we're back into that nice, stable home price zone again.
What can your asset class offer in the current environment?
Well the asset class tends to generate very stable underlying cash flows. In general, the portfolio composition that we have today, which consists of very seasoned mortgages, makes that even more so. So, the really stable underlying cash flows in a time of potential instability, which is where we are today and across various financial markets, means that this asset class can provide that low vol, nice yield, the stability that a lot of people are looking for and in a non-correlated manner versus other assets.
What is your outlook in the near and medium term?
The outlook is that this is a very good time to collect yield. The portfolio today yields in excess of 7% and we're going to be very happy to collect that yield, particularly since we're able to do that with a very conservative portfolio. And when I say that, what I mean is we're not concerned about recession potential or anything of that nature because the very seasoned nature of the underlying assets means we have a very high house prices versus the purchase because the purchase was 15 years ago. Also, the loan amount is much smaller today, so the loan is secured by a very high value asset. Also, the borrowers have that demonstrated ability to pay and they have been doing so through prior recessions such as the Great Financial Crisis. Put that together with the fact that over 95% of the portfolio is the most senior claim in the capital structure. So we have a lot of senior bonds in the portfolio, which means you are first in line to get all of your principal, all of your interest. That's the kind of conservative portfolio we put together, which means I think it's time to collect some really good yield.
Andrea Quapp highlights the fact both stocks and bonds are currently attractively rated, which is presenting her with asset allocation opportunities. She also mentions the importance of innovations such as artificial intelligence and, specifically for Switzerland, the appeal of the Swiss real estate market.
Christian Munafo of Liberty Street Advisors notes an improvement in market conditions for investors in late-stage private companies; many of these companies are similar to what public market investors used to seek in small to mid-cap growth stocks. He also stresses that many of them are not just high growth, they are also at or approaching profitability.
Goro Takahashi describes the key factors that influenced the Japanese market over the third quarter, particularly the main stock exchange’s ongoing initiative to improve listed companies’ financial indicators, and the areas he thinks investors should focus on into the turn of the year.
Julian Howard reflects on the combination of stretched valuation and a tight equity risk premium that has made equities less attractive in the short term. However, it does not undermine the very long-term case for equities, in his view. He also notes the long-term structural case for China.
GAM Systematic’s Dr Chris Longworth and Guglielmo Mazzola highlight bond sell offs and a commodities rally as significant market events, and note that systematic investment approaches can help provide investors with much-needed diversification for their portfolios.
Atlanti’s Gregoire Mivelaz highlights the three major events of Q3 that impacted his investment universe: earnings, bond call dates and the reopening of primary markets. He believes given we are now in a late credit cycle, credit quality matters for investors. And he notes that market mispricing is continuing to lead to opportunities.
Jian Shi Cortesi notes that weak sentiment in China is keeping Chinese equities at very low valuations, due to the soft economic growth, real estate drag and the ongoing China-US rivalry. However, she is optimistic about long-term prospects, with the conviction that in the long term earnings growth will drive stock prices.
Niall Gallagher shares his views on the implications of rising real bond yields and why he thinks central banks will continue to have to fight inflation rather than deflation. Niall also discusses the sheer scale of capital required to enable the energy transition, and some of the companies he believes stand to capitalise.
At GAM Investments’ latest Active Thinking forum, David Dowsett reflects on a calmer week in markets while Tom Mansley outlines why he believes the US consumer remains resilient in the face of recession and the why the underlying supply-demand mismatch is supportive for the US housing market.
At GAM Investments’ latest Active Thinking forum, David Dowsett considers whether the recent market rally will prove sustainable, while Tom Mansley argues that US consumer credit remains resilient, supporting mortgage-backed securities. Ernst Glanzmann reflects on the ongoing pendulum-like effect of the pandemic on Japanese equities and how a stronger yen and easing commodity prices could be supportive of the asset class going forward.