What were the major recent events and impacts on your asset class?
Well as you know, market does tend to move slowly. It's more of a strategic rather than tactical allocation as macro factors evolve. The most significant thing has happened lately, of course, is that the Federal Reserve Bank has paused in their hikes and the new mantra of higher for longer rather than more and multiple hikes is what's prevalent in the marketplace now. So a few weeks ago, even we had over 100 basis points of cuts built into the forward curve. Well, that's simply not going to happen. And the market realises that and that, hence the rise in rates. What's that doing to home prices? Basically nothing. We've had a very slight pullback about 2% in the last year, middle of last year. And today we're actually higher than that. So we've stabilised and resume the mild increase as the supply and demand factors overwhelm the higher rate. Again, a massive shortage of housing in the United States and a lot of demand for it.
What can your asset class offer in the current environment?
Simply put very stable cash flows. And since the yields are, the base yields going up everywhere, of course. However, spreads in our space are relatively wide, not as wide as the Covid peak, but certainly out there, which results in a relatively high overall base return.
What is your outlook in the near and medium term?
We're looking for continued stability. Consumer credit is still very strong. Of course, we're coming off of record low delinquencies and foreclosures and things of that nature. So of course that's going to tick up as we move forward but still remain far below average. So consumer credit is strong. Remember this is a fixed rate mortgage regime. So people really don't care if the market rate goes up. They've already got their nice little mortgage which is at a very low rate. It's a good time to collect the yield. We have that solid credit upon which to build and just sit and wait and collect a really nice yield. Longer term, I would also look for spread tightening. What we've got is a low supply of mortgage backed securities going forward. Higher rates, of course, they put downward pressure on supply in terms of refinancing in terms of new purchases. Because as all that slows down, there's less new product being created, yet there's still demand in fixed income for those cash flows. And therefore the spreads should come in and hopefully get some sort of capital gain.
Is there one chart you’re currently monitoring closely?
I would say no. It's more of a mosaic at this point. So we're looking at the macro and the micro. In terms of macro, everything looks pretty good for consumer credit, particularly in secured by asset at this point in time. And at the micro, the credit is good. Remember a vast majority of our holdings today are mortgages that were issued prior to 2008. They've been in their homes for a very long time. Demonstrated ability to pay. You've got a home price that's much higher than it was back in 2008 or prior, and a mortgage, which is much lower, providing a nice big equity buffer. And finally, the, I would say 95% of the portfolio is senior in the capital structure. So you are first in line to get your money back on a solid credit to begin with, which is secured by an asset. So that looks pretty good.
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.