Jack Janasiewicz, Natixis Advisors
Although the crystal ball for markets in the second half of this year is cloudy, investors can expect greater performance from risk assets such as equities, while playing it safer in the bond universe.
“The market requires a nuanced view, but with a critical lens there are certainly still opportunities to be found for those willing to look,” said Jack Janasiewicz, senior vice president, portfolio strategist and portfolio manager at Natixis Advisors.
While uncertainty persists and the “wall of worry” grows ever higher, he continues to remain constructive on both the economic recovery and the outlook for markets moving forward. “[We] expect risk assets to be higher by year-end.”
Favourable for equities
According to Natixis, financial conditions should remain loose for the remainder of 2021, in turn creating a supportive backdrop for equities.
More specifically, rate hikes will stay on hold well into 2022, if not early 2023. And with real rates remaining negative, there will be few alternative choices for putting money to work amid rising inflation.
“If we are proven wrong on our transitory inflation outlook, what is the best hedge? Equities,” explained Janasiewicz.
This is based on improving vaccination rates, leading to wider economic re-openings, luring consumers to spend more money on the services they have missed during lockdowns from Covid-19.
“That shift should help the service side begin to accelerate, with profits increasing meaningfully in the coming quarters,” said Garrett Melson, portfolio strategist at Natixis Advisors.
In line with the staggered global recovery, the firm believes the equity leadership baton might be passed from the US to Europe in the coming months, as the Eurozone roadmap – especially with vaccines – begins to unfold in a similar fashion to what has happened in the US.
“Ultimately, this rotation could finally make its way to emerging markets, but with a somewhat bifurcated response where Asia lags the rest of the emerging world,” added Melson.
Fixed income for managing risk
Across the bond universe, however, Natixis sees few opportunities for any attractive nominal yield, let alone a positive real yield.
“In inflation-adjusted terms, one has to move out the risk spectrum all the way to high yield and emerging markets debt to find any sort of positive yield. For all the claims of equities being overvalued, most fixed income markets are trading at far richer multiples than equities,” said Janasiewicz.
Within this reality, fixed income can fulfil the critical risk management role needed as part of the portfolio construction process.
“While we don’t overly focus on day-to-day volatility, it is important to maintain ballast in a portfolio to manage true risk-off scenarios,” added Janasiewicz. “Despite the lack of compelling yield, high quality fixed income continues to be the most reliable equity risk offset – and within that bucket, specifically nominal treasuries.”
Within credit, Natixis views both investment grade and high yield as continuing to look “extremely rich”, though both remain supported by the same persistent global search for yield.
“With high yield setting new record lows on a yield basis, leveraged loans continue to offer a modest yield pick-up,” explained Melson. “This trade may run into headwinds, however, as the fear of inflation fears continues to fade.”