Markets
Years of QE and ultra-low interest rates have caused income investors to migrate from fixed-income to dividend stocks, but things are shifting. The rising rates from the Fed have caused retail and institutional investors to really consider taxable fixed income as an income alternative. Investors are really interested in 4.5-5% investment-grade corporate debt with longer maturity. Investors believe we are reaching the bottom of the bond prices and short-term rates could be a little over 3% next year. Other advisors and institutional investors are skeptical that longer-term bonds like the ten-year treasury can prove to be appetizing in the next decade.
Finsum: Things are precarious in the bond market still but medium-range corporate debt is delivering an attractive yield currently.
Markets are super volatile in response to a variety of macro Factors and a 50-basis point hike from the Fed last Wed. JPMorgan is touting its Equity Premium Income ETF (JEPI) as a solution for investors who tries to target the returns in the S&P 500 with less volatility. The covered call equity strategy is the way the fund tries to mitigate market volatility but those calls aren’t free. The fund is targeting 6%-9% yield scoring to the global head of ETF solutions at JPMorgan. The volatility has actually served the fund well allowing it to outpace its own expectations.
Finsum: Covered calls are by no means a new strategy but they are effective in limiting volatility.
The IMF has warned investors that there are growing concerns about an emerging market debt crisis. There is anxiety that sluggish growth, higher interest rates, and surging inflation will hurt developing economies much more severely than developed ones. They will be disproportionately affected because highly indebted countries will have a dip in their investment and suffocate their currencies. These concerns aren’t new and emerged at the start of the pandemic, but this swell seems different. The Fed responded by pumping trillions into the economy in 2020 and they are doing the exact opposite now. Additionally, war and other risks are heightened now with Russia-Ukraine’s escalation.
Finsum: Investors searching for yield should be wary of emerging market bond funds given unprecedented risk levels.
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Global turmoil is on the rise, but just as threatening to domestic returns is skyrocketing wages in the U.S. Sure there were great returns last year despite higher wages and inflation, but what stocks are primed to succeed in this current environment? The first is Arcutis Biotherapeutics which has an important drug in stage three clinical trials, which Goldman says could be very profitable. Next is Tricidia another pharma company that has a high buy rating and a potential upside of 126% according to analyst Madhu Kumar of Goldman. Coupang is the final pick which is a South Korean e-commerce retailer. They showed impressively robust revenues when the economy reopened and has great operating leverage according to Eric Cha of GS.
Finsum: These could be potentially good candidates in the tumultuous markets we are seeing currently.
You know what sounds nice, consistent diversified income with little risk, but the problem is finding those solutions is difficult if not impossible. Model portfolios have popped up in the last decade to tackle this very problem, but there aren’t great options with diversity. One of the biggest reasons is treasury yields are still drastically lower than in the pre-financial crisis era. Nonetheless, there are pretty consistent income options, but they are riskier than ever because regardless of the model equities, high-yield debt, and emerging market debt are all more correlated than they have been in decades which means these funds fail to diversify. The GFC and the covid pandemic put a focus on macro fundamentals that the Greenspan-put eliminated.
Finsum: Income models can come with their risks, particularly as markets are getting more volatile.
Investors were beginning to be skeptical of Hedge Fund performance, but volatility was enough to get them back in. Inflows this quarter have hit a 7-year high as they nearly hit $20 billion in Q1 2022. The biggest factors were inflation, the Fed’s response, and rising geopolitical tensions, which are all major sources of volatility recently. Macro strategy had the best performance for Q1 with a 9.1% return which is the highest its been in nearly 30 years. Multi-strategy and value were next up all with positive returns. The S&P 500 meanwhile dropped 5% over the same period. Corporate credit default and other short positions have been grabbed up by hedge funds recently to help counter volatility.
Finsum: This is a hedge fund's most crucial role in the financial world, they excel in these macro scenarios that are crippling standard markets.