Rick Rieder and Russ Brownback highlight the investment themes that they think will drive markets and dominate debate within the investment community over the next several months and beyond.
Over recent weeks, we have been vocal about five “big themes” for markets that will likely dominate the second half of 2019. These themes take stock of a collection of secular and cyclical factors that have combined to create an unprecedented macro backdrop. Specifically, over recent quarters excessively tight global monetary policy and contracting global liquidity have conspired with ongoing secular disinflationary forces and velocity-dampening trade friction such that while global real economy performance has been okay this year, it is far from optimal. Still, we think the market influence of these encumbrances is poised to abate over coming weeks and we are adjusting positioning accordingly.
Dearth of yield availability supports income-producing markets
Our first theme is quickly becoming common refrain; quite simply, there is not enough investment income available in the world today relative to the aging population that desperately needs it. As a case in point, nearly 30% of developed market (DM) global government bond debt is negative yielding today, while almost 80% of it yields less than 2%. Moreover, yields across credit sectors are similarly scarce, as issuance from traditional “yieldy” entities is plummeting due to dwindling global demand for traditional debt-financed corporate capital expenditure.
A similar decline in net new debt issuance is likely across less traditional sectors as well, including municipals, and commercial and residential mortgage backed securities. Simultaneously, downward pressure on interest rates is exacerbating the deficits associated with universally unfunded liabilities (pension funds, etc.) that are already suffering from this shortage of yield issuance. We believe that this technical influence is structural in nature and will therefore be firmly entrenched for the foreseeable future (see graph). Accordingly, we are endeavoring to sensibly purchase income and cash flow where possible, while steering clear of lower-quality assets, and being sensitive to the liquidity-premium in some assets today.