Ask the Portfolio Manager: Amit Soni
New York Life Investments’ Strategic Asset Allocation and Solutions (SAS) team speaks on the most pressing global economic and markets issues.
Lauren Goodwin, CFA, Economist and Multi-Asset Portfolio Strategist, New York Life Investments: Amit, thank you for taking the time to give us a sense of your team’s key views heading into the end of the year.
Amit Soni, Portfolio Manager: It’s my pleasure.
Lauren: To begin, what is your view on the Federal Reserve in the next year?
Amit: Economic conditions suggest that the current Fed policy trajectory is appropriate. Core inflation is near target, unemployment is low, and financial markets have thus far been resilient to changes in policy. Two more hikes in 2018 are probable; continued balance sheet runoff is also likely, within the framework that the Fed has already announced. Anticipating policy developments in 2019 is more difficult. Fed actions to date appear to be having a material impact on some non-U.S. markets, particularly emerging markets. In addition, some forms of domestic consumption (homes, autos) are also showing effects. At the end of the day, the Fed will follow the economic data in making their decision. A slowing of the pace of rate hikes would not be surprising. Two more hikes that leave the upper bound at 3% at the end of 2019 is not an unreasonable expectation.
Lauren: How will this policy trajectory impact interest rates, and particularly 90-day and 10-year securities?
Amit: Three-month rates will track Fed policy tightly. As such, we expect to see the secured overnight financing rate (SOFR) near 3% at the end of 2019 (and three-month London Interbank Offered Rate (LIBOR) another 0.2%-0.3% higher). Mounting federal deficits, a shrinking Fed balance sheet, and sustained inflation above 2% will likely push the yield on the 10-year higher also, but not quite to the same degree as overnight rates.
As far as the yield curve is concerned, the 2/10 curve will remain relatively flat without inverting as the 10Y reaches 3.5%, maybe a bit higher.
Lauren: How is the team considering U.S. equities compared to international equities?
Amit: While a strong U.S. economy makes it likely that U.S. equities will continue to rise, their outperformance relative to the rest of the world has largely run its course. Economic performance is firming globally and valuations strongly favor non-U.S. markets.
Lauren: Within international, what is your perspective on Emerging Markets?
Amit: Long term, emerging markets look very attractive from the perspective of both potential growth and relative valuation. But, near-term prospects are highly uncertain. Trade tensions, dollar strength, and tightening monetary conditions could all contribute to weakness over the next couple of months. We remain overweight, but only very modestly so.
Lauren: How will escalating trade tensions impact markets?
Amit: An agreement on NAFTA is imminent. Negotiations with the European Union are likely to take quite a bit longer but will ultimately be resolved favorably. The dispute with China looks rather more intractable, although there too negotiations will eventually succeed. Near-term damage to the economy will be very modest, although the reaction in capital markets might be somewhat amplified. Longer term (within the next year), trade will no longer be in the headlines – both economic activity and financial markets will have witnessed a bump from more favorable trade conditions.
Lauren: Your preference for Growth versus Value?
Amit: We have a keen preference for value that has grown as the year has worn on. The growing divergence in valuations is part of the story, but it has more to do with sector composition. We anticipate non-tech cyclicals (dominating value) will fare well as the global economy enjoys a late stage growth spurt. At the same time, the threat to tech (dominating growth) from regulation/litigation appears to be mounting.
Lauren: What is your preference in the fixed income area?
Amit: We have a pronounced “quality tilt” in place as we are leery of pricing, leverage, and underwriting standards in credit markets (both loans and bonds). We are slightly short duration with an eye toward extending it, as yields rise and we move closer to the next recession. We also hold positions in municipal bonds as a means of improving credit quality and diversifying sources of credit risk.
Lauren: What is your preference between large cap and small cap?
Amit: We still lean modestly into small caps, but we no longer have a strong preference for one over the other. We were more committed to small caps earlier in the year, expecting them to benefit from disproportionately from tax reform, industry deregulation, trade tension and a stronger dollar. Those effects may now be dissipating and, in some cases (trade, dollar strength), have the potential to reverse.
Lauren: How long does the U.S. recovery have left to run?
Amit: Our models show that a recession in the next year is unlikely. In two to three years, it becomes much more likely. Of course, these models would change as the economic data does. However, we are not yet making our portfolios strongly more defensive.
Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.
All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market. Past performance is no guarantee of future results.
Bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk which is the possibility that the bond issuer may fail to pay interest and principal in a timely manner.
High yield securities (junk bonds) have speculative characteristics and present a greater risk of loss than higher quality debt securities. These securities can also be subject to greater price volatility. Diversification does not guarantee profit or protect against loss.
Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity.
The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months, and pays the face value to the holder at maturity.
Duration measures interest-rate sensitivity. The longer the duration, the greater the expected volatility as rates change. Fixed Income investing entails credit and interest-rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall.
Growth investing is an investment style and strategy that is focused on the growth of an investor’s capital. Growth investors typically invest in growth stocks or companies whose earnings are expected to grow at an above-average rate compared to its industry or the overall market.
Large cap (sometimes “big cap”) refers to a company with a market capitalization value of more than $5 billion. Large cap is a shortened version of the term “large market capitalization.” Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. The dollar amounts used for the classifications “large cap,” mid cap” or “small cap” are only approximations that change over time.
London Interbank Offered Rate (LIBOR) is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is a primary benchmark for short-term interest rates around the world.
Secured overnight financing rate (SOFR) – Originally known as the broad Treasuries financing rate, the secured overnight financing rate is a measure of the cost of borrowing cash on an overnight basis in the U.S. Treasury repo markets.
Small cap is a term used to classify companies with a relatively small market capitalization. A company’s market capitalization is the market value of its outstanding shares.
Value investing is an investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued.
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