Week of October 17, 2022
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
It’s interesting to get a peek into what others are thinking. Markets are perhaps one of the most dynamic laboratories in encapsulating the wisdom of crowds, but surveys can also fill in the texture.
One of the most notable roundups of global fund manager views is from Bank of America. The bank has been tracking opinions and sentiment for decades and can benchmark against those trends. The headline in its current report is that fund managers are more bearish on equities than they have ever been, including the treacherous days of 2008. They are also hogging oversized piles of cash.?
This is a dramatic shift from the beginning of the year when all looked tame. Now, as central banks pound on inflation, fears of liquidity crunches and financial accidents are worrying fund managers. Financial instability concerns are at an all time high. And fund managers view European sovereign and bank debt as the most likely source of a systematic credit event.?
In all the gloom, fund managers do see some end game as they expect the fed funds rate to peak in the 4.5% to 5% range during the first half of next year.
Source: Bloomberg, 2022.
Linda Kong Ting, CFA Kong Ting, Senior Director, Credit Analyst
U.S. banks and financial companies spent most of the second quarter assuring us that the prolific American consumer was as hardy as ever. This week it became clear that the cracks are beginning to form. Ally Financial, a bellwether company in auto financing, noted that its retail auto net charge-off rate was 1.05%, up 78 basis points, and raised its provisions for credit losses more than fivefold. While some of this may reflect a 10.3% year-on-year decline in the Manheim auto index in October 2022 – Ally noted that this reflected expected normalization in credit – it feels like the inflection point has arrived for the U.S. consumer. As weakness accelerates, we focus on well-capitalized financial institutions with strong deposit bases in which increases in net interest income thanks to higher rates should cushion higher credit losses.
Source: Ally Financial Inc., Used Vehicle Value Index, 2022.
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Andrew Kleeman , Senior Managing Director, Head of Corporate Private Placements
The investment grade private credit (IGPC) market is busy again after a weak September, ranging from consistent issuers like U.S. utilities to more interesting cross-border transactions and structured deals. We have seen a wave of non-cyclical issuers bringing deals at a time when public bond markets are not consistently open in the U.S. and financing in the U.K. and Europe is difficult. As a result, issuers are seeking better execution in the IGPC market. We hear some investors that were active earlier in the year are on the sidelines today or have smaller bids.
Agents have told us that market depth is a concern, especially with larger deals. This is creating opportunities for our clients to finance strong credits in which we have more pricing and structuring power than we have seen in recent quarters. The opportunity set reminds us of the summer of 2020, when market dynamics created less investor competition, although yields are higher now. Volatility is still top of mind for issuers, and we continue to hear about borrowers that are “on the fence.†How the pipeline plays out is then hard to predict. We are excited about the opportunities to achieve exceptional relative value for our clients.
Melissa Boulrice , Director, Asset Management, Public Fixed Income
The latest Consumer Price Index (CPI) print shows Canada may not be out of the inflation woods just yet, with headline CPI increasing 0.1% in September. This resulted in a smaller-than-expected deceleration of the annual rate to 6.9% from 7.0% the prior month, higher than expectations of 6.7%. Food prices rose more than anticipated and a higher U.S. dollar isn't helping. In fact, prices for food purchased from stores grew 11.4%, the fastest year-over-year pace since August 1981. These prices have been increasing at a faster rate than overall inflation for 10 consecutive months.?
Besides food, strong moves during the month included a big rise in mortgage interest costs, as Canadians renewed or initiated loans at higher rates, as well as homeowner repairs and autos. While lower gas prices slowed goods inflation, cost inflation in services accelerated to 5.6% from 5.5%. The persistence of inflation will likely force the Bank of Canada to hike rates by 75 bps at its meeting next week.
Source: Bank of Canada, Bloomberg, 2022
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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