Markets
The Fed had its largest hike in two decades, and the ECB has gone ultra-dovish. This has sent a huge influx of Euro area investors into U.S.-short-durations bond ETFs. Funds like the iShares 3-7yr UCITS ETF had over $600 million in inflows last week. Short-duration corporate debt was also favored by euro area investors. Overall the bond market had seen an exodus in the previous weeks but this confluence of factors has been enough to entice investors. While the Fed has made up its mind they have contributed to inflation, bank heads in Europe are mixed which will leave policy to be accommodative for the near term.
Finsum: The Fed could be over-reacting and Europe could be under-reacting to inflation, but if Europe doesn’t tighten they will find their bond market in a similar position to the US a couple of weeks ago.
Markets are in turmoil which has investors looking for more secure options, but American bonds are a risky option with rising yields (falling prices), which means active international is in a good position. Over the last year, 82% of active bonds have outperformed, and while that doesn’t hold up in the long run the unique conditions put them in a good position. International bonds can offer less interest rate risk, already better yields, and comparable credit profiles. The added advantage of international active funds is investors can make hedges with currency trading which can allow investors to hedge or leverage for more potential gains.
Finsum: The Fed will continue to put pressure on both bonds and equities in the U.S., and investors need a backup plan.
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.
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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.
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.