This time of year always makes me reflect on the intense seasonality of our business. As the calendar turns to September, investors return from vacation, news flow ramps up, progress versus objectives is assessed even as planning for the coming year kicks off and markets reset themselves as liquidity begins to return.
It’s as if a starting gun fires to launch the sprint to year-end. But are we running the 100-metre dash, where the spoils go to those who barrel toward the finish line, or the 110-metre hurdles, where a series of obstacles can knock competitors off the track?
In advance of our asset allocation committee meeting at the end of the month – where we recalibrate our views for the coming six to 18 months – we try to answer that question by highlighting the key issues that we believe bear watching between now and the end of the year.
Cracks in the credit market
From the bottom-up perspective, we will be watching earnings reports for signs that rising wages and interest costs are tightening margins at companies with high operating and financial leverage. These companies would be especially at risk from stagflation, as that would make it more difficult to pass costs on to consumers.
Similarly, we are looking out for cracks in the credit market as the high-yield maturity wall comes ever closer and the first policy rate cuts get priced further and further out, raising the threat of expensive refinancings. This is perhaps the most visible threat, and therefore one we think could be priced in sooner rather than later – a ‘canary in the coalmine’ warning of broader market volatility.
Anticipating change
At its last meeting, our asset allocation committee moved its views broadly to neutral in the face of sharply conflicting signals from its short- and medium-term outlooks.
Given the several sources of potential volatility lurking between now and year-end, however, it is not surprising that these neutral views are defensive at the margins and will be assessed closely at our next asset allocation committee meeting. We see hurdles ahead, not a straight dash.
In equity and credit, our defensive inclination means a more favourable view of high-quality companies, and especially those with plentiful free cash flow, high cash balances and less expensive longer-term debt. Even putting business conditions aside, these firms are currently earning far more on their cash than they are paying on the bonds they termed out before 2022. This view on quality also leads us to favour emerging markets debt over high yield.
The view on core government bonds is more complex and the subject of debate, both within our multi-asset team and between us and our colleagues in fixed income. Long-dated yields are at the top end of the range we have been forecasting for this year, making interest rate exposure more attractive – but demand for more term premium could cause long-term yields to be higher for longer.
Overall, it is fair to say that we are anticipating change. We find it increasingly difficult to imagine the persistence of recent market conditions. That seems appropriate for the time of year: Once the starting gun sounds, attention must be on the race in front of us, not the previous day’s qualifying heats.
Erik Knutzen is chief investment officer – multi-asset class at Neuberger Berman. The views expressed above should not be taken as investment advice.