Week of May 29, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
China’s post COVID economic recovery continues at a tepid pace. After China swiftly abandoned its restrictive lockdown policies in January, the world braced for its second largest economy to rebound with a bang. But a surge in consumer spending has not emerged. Chinese households remain cautious. Global demand has softened and profits for many local industrial companies have dipped. Home sales are down, business and consumer confidence are below pre-COVID levels and youth unemployment is at record highs. The most recent official purchasing managers’ index (PMI) shows that manufacturing activity is contracting.
While China experienced similar demand and supply dynamics as other countries during lockdown, it is the only major economy since early 2020 to have experienced consumer deflation. As a result, it may have to resort to rate cuts and targeted stimulus to give a jolt to its recovery. Policymakers continue to target 5% real GDP growth for this year but probably need to do more to help get there.?
Source: Bloomberg, 2023.
Linda Kong Ting, CFA , Senior Director and Credit Analyst, Asset Management
Looking back on an eventful month of May, the most critical themes weren’t in the corporate bond market at all – they were in the debt ceiling debate, as well as in the rapid rise of seven technology stocks related to artificial intelligence (AI) that have accounted for the vast majority of S&P 500 Index gains year to date. As political gridlock subsides, we’ve been thinking about the impact of AI on the economy more generally. Which jobs look the most vulnerable here? Surprisingly, while call centers might appear the most vulnerable at first glance, most of us learned during the pandemic that it’s comforting to talk to a real person. Therefore, jobs that are enhanced by personal service, live sales pitches or other required in-person appearances may be productivity-enhanced or upskilled, rather than eliminated, by AI.
At the same time, the recently infamous pratfall of a lawyer who generated fake case citations with ChatGPT demonstrates that outputs requiring mission-critical certainty may be safe for a while longer. Therefore, the non-intuitive answer may be that AI replaces the type of labor that has already been offshored to some extent to middle-income countries – low level computer programming and non-client-facing administrative, regulatory compliance and back-office work. Therefore, we think AI will quicken the path of deglobalization. We also see further catalysts from AI in the additional valuation bifurcation between premium, highly amenitized new-build commercial real estate and more quotidian properties even in the Class A office space, as onshore employees with similar types of work may have differing needs for physical space if they transition toward prompt-engineering tasks or find their positions eliminated entirely.
Source: Bloomberg, New York Times, 2023.
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Melissa Boulrice , Senior Director, Asset Management, Public Fixed Income
Canada’s first-quarter GDP was stronger than anticipated, coming in at 3.1% annualized versus the 2.5% expected by economists, and was also hotter than the Bank of Canada’s forecast of 2.3%. This can be viewed as another data point showcasing the resiliency of the Canadian economy. With the Bank of Canada’s next meeting just a few days away, there is little doubt that, at the very least, we will hear a more hawkish tone from policymakers.
Source: Bank of Canada, 2023.
John Fekete , Managing Director and Head of Capital Markets, Crescent Capital Group LP
Debt ceiling drama and the potential for further rate increases by the U.S. Federal Reserve have caused the BB/Ba2 segment of the U.S. high yield market to sell off, resulting in what we believe to be the most attractive valuations seen since Q4 2022. The yield to maturity today for the double-B space is 7.3%, the highest level since last October. The average dollar price of a BB bond is below 90% of par, down from 92% in January. Slower growth and higher borrowing costs impacting households and businesses are mitigated by the highest ever recorded interest coverage ratio for U.S. high yield, according to JP Morgan. At the same time, leverage multiples are at their lowest level in nearly 15 years. Investors could benefit from an attractive “coupon-clipping” environment following the material reset in yields in 2022. Capital appreciation potential on top of coupon income could result in a double-digit return, given that the asset class benefits from a “pull to par” as bonds approach their maturity date.
Source: Bloomberg, 2023.?
Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not?constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.
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