Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Recession or not, challenges are real: Neuberger
The biggest question on the minds of every investor in the world today is clear: will the US experience a recession? According to global asset manager Neuberger Berman, the world sits at an “important juncture” following a “tumultuous quarter” in which central banks put the brakes on both the equity and bond markets.
Switching yields from a tailwind to a headwind, the manager explains that the first half of 2022 was all about “pricing for tighter financial conditions” but there is still a long way to go. “The selloff so far has been all about downward adjustments to valuations” and little attention paid to the more important input, being earnings.
Neuberger’s view is that recession or not, the next 6 to 12 months will feel to investors like we are in one anyway.
“We think that the Federal Reserve’s rate hikes for this cycle are being increasingly priced-in…..we do not anticipate a meaningfully higher discount rate,” the firm explains. This means the current selloff, in which investors have been resetting the P in P/E ratios, being the valuation, may well be nearing its end.
The bigger risk though, is that the aggressive rate hikes will “crimp demand, slow the US economy and help bring inflation down” by the end of the year. “Earnings arrive in nominal dollars,” says Neuberger, which means they could face a flat five per cent reduction when inflation is accounted for, and that’s before any economic slowdown, which the firm thinks is coming. With the risk that lower earnings are still not priced-in, Neuberger thinks that could put additional downward pressure on equities.
On the positive side, this “reset” has allowed significant value to re-emerge in fixed-income and credit markets. “We think recession is closer to being priced into credit markets,” explains Neuberger, with high-yield spreads back beyond 500 basis points and offering 8 per cent-plus yields. Neuberger’s fixed-income team has stress-tested the sector for a full recession, with its research suggesting the risk of defaults remains “benign.”
A key reason behind this is the fact that any slowdown, or recession, will be consumer-led rather than driven by problems in the financial sector, meaning more pain will likely be felt by the retailers and not the broader economy.
Assessing the opportunities on offer today, “there is more yield to work with in investment-grade corporate and US Treasury markets,” with hints that the curve may be past the point of peak yields. “Bonds can provide some meaningful ballast for defensive portfolios for the first time in a long while,” as inflation reverses.
As it stands, the firm favours lower-beta exposures in equities, commodities and an overall tilt to fixed-income. “The coming months are likely to be difficult, but difficult periods are those in which the foundations for potential long-term returns are built,” Neuberger concludes.
