Some macro risks—such as Brexit—appear to be de-escalating, but uncertainties continue

OpinioPro Selection
By January 14, 2020 10:34

Some macro risks—such as Brexit—appear to be de-escalating, but uncertainties continue

Spectrum Asset Management: 2020 Outlook

Macro and market

  • Some macro risks—such as Brexit—appear to be de-escalating, but uncertainties continue; trade war negotiations are likely to overhang sentiment into the United States election.
  • The U.S. election process should be spirited and potentially pivotable to the long-term outlook if socialist trends unexpectedly gain momentum.
  • Rates are likely to stay low in 2020, but the yield curve should steepen (with the front end yielding less and the back end slightly more), as quantitative easing (QE) on both sides of the Atlantic happens in confluence.
  • Resumed central bank balance sheet expansion should foster support for global economies, and equities should respond favorably, as they have in the past, leading to tighter spreads for junior-subordinated capital securities.
  • Bond markets appear to be anticipating some inflation lift from new signals to the market environment—these are presumed Federal Reserve (Fed) balance sheet growth and limited bond supply in the European Union (EU). Chronically low inflation is symptomatic of policy failure and should lead to prospective policy adjustments with new rules designed to detonate desired inflation—especially if QE’s repeated outcome is only negative rates, which are a broad tax on savings and dysfunctional to innovation and investment.
  • The $25 par sector outlook is cautious, as much of the sector is overpriced; security selection is a key necessity to investing efficiently in this space.
  • The $1000 par preferred security sector has adequate relative value appeal, and we expect spreads to move as much as 55 basis points (bps) tighter.
  • The contingent convertible capital securities (CoCo) sector has the most favorable relative value appeal, being nominally higher yielding than the non-convertible (NoCo) sector; we expect CoCo spreads to tighten as much as 85 bps.
OpinioPro Selection
By January 14, 2020 10:34

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