Uncertainty prevails, so quality is king: Neuberger Berman
The continuing tightening inflationary cycle and prevailing macroeconomic uncertainty is placing the quality of issuance at a premium, according to global money manager Neuberger Berman, as lower-rated issuers sliding down the relative value ladder.
In a recent note to unit holders, the New York-based investment management firm expounded on some of the conditions making issuer quality “more apparent”.
In the U.S., Fed Chair Jerome Powell (pictured, right) made clear at the recent Jackson Hole Economic Policy Symposium that the focus is on uncertainty, with a “marginally hawkish” tone on inflation. So fine is the position on inflation that under current policy directives, “the balance is being decided, day-by-day, by incoming data”.
The inflation narrative continues to fuel uncertainty. While Powel believes the U.S. is moving “sustainably” towards its inflation objective, it’s believed there is still a lot of of lag left in the effect of recent rate hikes. The problem, Neuberger Berman argues, is that no one knows just how much. The US economy is still stubbornly strong, with GDP growth again beating expectations and unemployment persistently low. The U.S continues to teeter on its economic tipping point.
In Europe, a similar theme pervades. Old models are unreliable, argued European Central Bank President Christine Lagarde (pictured, left), due to “a fundamental change in the nature of global economic interactions”. Labor markets are on edge, and the very nature of work is influx due to the global white collar work-from-home transition. Energy infrastructure is in a transition of its own, she said, while geopolitics is fragmenting the globalised economy.
“Markets generally greeted these speeches as moderately reassuring, even though further rate hikes still appear to be at the top of investors’ list of concerns,” Neuberger Berman said. “We think that is partly because Powell’s commentary on the lagged effects of monetary policy offered some dovish balance.
“There was little of the anticipated discussion of how the neutral rate is estimated and where it might be. However, Powell was clear that the Fed thinks real rates are ‘well above mainstream estimates’ of the neutral rate, and therefore ‘restrictive, putting downward pressure on economic activity, hiring and inflation.’ He suggested there may be ‘significant further drag in the pipeline.'”
But again, the level of drag left from rate rises around the world is as disparate as it is uncertain, which means quality issuers increase in relative value compared to cheaper, low quality issuers.
“In contrast to trends in place since the Global Financial Crisis, we believe that monetary policy will be less forgiving, reinforcing the importance of credit research and attention to the underwriting of particular issuance,” Neuberger Berman stated. “Such an environment, in our view, will enhance the value that active managers can provide across the fixed income universe.”