Displaying items by tag: inflation

Morningstar Investment Management (MIM) shared its 2024 outlook for financial markets. It’s particularly bullish on fixed income due to attractive valuations, generous yields, and falling inflation. Within the asset class, it likes developed market bonds, emerging market debt, and inflation-linked fixed income. 

While it sees more upside for long-duration bonds, it sees value in shorter-duration bonds for more risk-averse investors especially given that geopolitical risk will likely remain elevated in 2024. However, the yield curve is inverted which is typically a leading indicator that rates, and inflation are going to trend lower. Both developments would be more favorable for longer-duration fixed income. 

It also sees bonds returning to their traditional role of dampening portfolio volatility by providing a hedge against equities and meaningful income to investors. Due to the rise in yields, investors no longer have to take on risks in search of income as they often did during the previous decade. 

In regard to corporate bonds, it sees downside risk in the event of a recession as they are ‘priced for a slowdown, not a recession’. MIM is also concerned that high rates could erode company fundamentals especially in an environment of declining revenue and earnings. Thus, it recommends keeping a close eye on credit spreads and high yield bonds

Finsum: Morningstar Investment Management shared its 2024 outlook. It’s bullish on fixed income, specifically long-duration government bonds but more cautious on corporate debt given the risk of an economic slowdown turning into a recession.

As the calendar turns to a new year, it’s an opportune time to check in how experts are thinking about various asset classes. According to Jason Bloom, Invesco’s head of fixed income and alternatives, the market has been overly defensive for the last 2 years. However, this attitude is now changing as the consensus increasingly believes that a soft landing is likely. 

Flows into fixed income have fluctuated with investor sentiment rather than in search of optimal returns. As a result, many investors may be missing out on opportunities and underexposed in the event of a rising market, he warned. 

Bloom added that, “The market has really been in this state of sort of almost living in a world that is very different from the truth and reality of the underlying economy. For almost two years now, we’ve been three months away from a recession. The market has been perfectly wrong in predicting a Fed rate cut six months from now for the last two years. That trend has been incredible.”

Bloom wants to continue positioning against the consensus by betting on the economy remaining healthier than expected, and the Fed cutting less than expected. He believes inflation will continue to moderate although the 2% target is more of a floor rather than a ceiling. Given this outlook, he favors high-yield and leveraged loans given that default rates are likely to stay low if the economy remains robust.   

Finsum: Invesco’s Jason Bloom is optimistic about fixed income in 2024. He recommends continuing to bet against the consensus trade by expecting a healthy economy in 2024 and fewer rate cuts than expected.

There was a major turnaround for US REITs in November as the industry raised $5.1 billion of capital compared to $1.3 billion in October. It was also an 89% increase from last November’s figure of $2.7 billion. YTD, the sector has raised $53.4 billion in capital, an 18% increase from last year’s first 11 months. 

Nearly all of the capital raising came from debt issuance with the remainder from common and preferred equity offerings. The biggest contributors were hotel landlord Service Properties Trust and mall owner and operator Simon Property Group who raised $1 billion each. Realty Income Group raised $951 million through two separate debt offerings.

YTD, the biggest debt issuance has been Uniti Group’s $2.6 billion at the start of the year. And the biggest capital raiser has been American Tower at $7.1 billion followed by Prologis at $5.4 billion. 

In terms of subsectors, specialty REITs, which encompass advertising, casino, communications, datacenter, energy infrastructure, farmland, and timber, had the most capital raised at $17.4 billion. Next was retail REITs at $9.4 billion, followed by industrial REITs at $7.9 billion. 

Finsum: November was a successful month for REITs in terms of capital raising, significantly better than last month and last year. Nearly all of it was through debt issuance.

There was strength across the board in fixed income following an inflation report that continued last month’s cooling trend and a dovish FOMC meeting. The yield on the 10-Y was 27 basis points lower, while the yield on the 2-Y dropped by 36 basis points. 

The November CPI report showed a monthly gain of 0.1% for the headline figure which was in-line with expectations and a slight increase from last month’s unchanged print. Core CPI came in at 3.1% on an annual basis which was consistent with expectations. Overall, the report indicates that inflation continues to moderate and is getting closer to the Fed’s desired levels.

While fixed income rallied following the CPI, the rally accelerated following the dovish FOMC meeting and press conference. The Fed held rates steady but surprised markets as it now expects 3 rate cuts in 2024. It also downgraded its 2024 inflation forecast to 2.4% from 2.6%. 

In his press conference, Chair Powell affirmed progress on inflation and noted that the economy was slowing in recent months especially from Q3’s rapid pace. He added that high rates were negatively impacting business investment and the housing market. Markets jumped on his remark that further rate hikes were ‘not likely’ although possible if necessary. 

Finsum: Treasury yields were sharply lower following a soft CPI report and dovish FOMC meeting. Stocks and bonds were bought higher as the Fed is now forecasting 3 rate cuts in 2024. 

REITs have seen big gains in recent weeks with the FTSE Nareit All Equity index up nearly 12% in November and now green on the year. The major catalyst for recent gains has been increasing certainty that the Fed is nearing the end of its hiking cycle and may begin cutting rates by the second half of next year.

According to the REIT industry association Nareit, this strength will continue in 2024. In its outlook piece for next year it said, “We are cautiously optimistic that despite those challenges, the REIT recovery could begin next year. The impressive performance of REITs during late October and November may be a signal that, as in previous periods of monetary policy adjustments, the end of the rate-rising cycle will herald a period of REIT outperformance.”

Based on historical precedent, REITs have returned 20% over the next year following when rates stabilize which is better than stocks and private real estate. It also forecasts the performance gap between public and private real estate shrinking during this period. However, John Worth, Nareit’s executive VP of research and investor outreach, warns that these returns will be lumpy which means that investors will be rewarded for being in the market rather than timing the market.

Finsum: REIT stocks are seeing a strong rally in recent weeks amid optimism that inflation is falling and that the Fed is done hiking rates. Here’s why some see it extending into next year.