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Market View

What areas of the market should investors be thinking about with rates near record lows in the United States—and in negative territory in much of the rest of the world?

With recent news that yields on more than $17 trillion of global debt had fallen below zero (based on Bloomberg data), and that the yield on the 10-year U.S. Treasury note had dipped to the lowest level since 2016 (Chart 1), investors’ ability to navigate a low interest-rate environment has taken on added urgency. (We’ll have more on the potential implications of negative interest rates in next week’s Market View.) For many investors, the yield question features another dimension: generating sufficient tax-free income as the effect of tax-law changes continues to reverberate in the United States.

 

Chart 1. The 10-Year U.S. Treasury Yield Recently Dipped to Multi-Year Lows
Data for the period January 4, 2016–September 13, 2019

Source: Bloomberg. Data as of September 13, 2019.
The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Investors may experience different results.
Past performance is not a reliable indicator or guarantee of future results.

 

We often get questions from advisors and investors about possible approaches to these issues. Indeed, we have written extensively about these topics in Market View and other sections of lordabbett.com. This week, we decided to summarize our experts’ views by focusing on five key areas of opportunity we think investors may want to consider.

1. Dividend Growers

Historically, falling rates have been associated with equity market uncertainty. But high-quality dividend growers (stocks of typically blue-chip companies with a history of consistently paying and growing their dividends) have tended to be among the best performers in such an environment, helping to mitigate volatility and providing investors with a relatively attractive income stream.

“Dividend growers tend to be blue-chip companies with stable businesses whose stocks have a history of not only weathering bouts of volatility but also participating in market rebounds. Naturally, investor demand for these equities might increase during periods of uncertainty.”

– Trent Houston, Lord Abbett Product Strategist

2. Growth Stocks

Contrary to what some investors may think, growth stocks don’t depend on strong economic growth for their success, but have specific characteristics related to the company’s own business prospects. As such, stocks of high-growth companies typically generate earnings in all economic environments.  Investment success will tend to be less driven by cyclical economic factors, and more about successful implementation of the company’s business plans, and these types of stocks historically speaking tend to outperform the rest of the market during periods of low returns and low economic growth.

“Today, there is a good argument to be made that low-volatility or ‘safety’ stocks might carry greater risk for investors in the long term, since their multiples have expanded but their prospects for underlying organic growth have not. You could counter that investing in the stocks of innovative, high-growth companies may be a more compelling opportunity for the next 10 to 20 years.”

Brian Foerster, Lord Abbett Investment Strategist

3. Tax-Free Income

Last year, more money flowed into short- and intermediate-term municipal bond mutual funds, according to Lipper, reflecting concerns about rising interest rates. This year, individual investors have shown particular interest in the longer-term sector of the muni market, perhaps reflecting a greater degree of comfort with the direction of interest rates – i.e. down, not up. Of course, even as market conditions change (especially supply and demand dynamics), the benefits from the tax exemption of municipal bond interest have remained constant.

“The positive performance in the tax-free sector year-to-date in 2019 has greatly benefited investors. We believe that current supply/demand dynamics are likely to continue to provide solid support for the municipal bond market.”

Dan Solender, Lord Abbett Partner and Director of Municipal Bonds

4. Emerging Market Bonds

For investors willing to take on some credit risk, emerging market (EM) bonds offer the potential for attractive incremental yield opportunities. With global central banks moving in near-total synchrony to lower key interest rates, we expect an increase in demand for higher yielding EM bonds.

“Easier financial conditions have been almost always positive for emerging-market debt, especially when interest-rate differentials are growing larger between advanced and emerging markets.”

John Morton, Lord Abbett Portfolio Manager, Emerging Markets Debt

5. Multi-Sector Bond Strategy

More risk-averse investors may want to consider a diversified multi-sec­tor strategy that includes an allocation to high yield (where both yields and valuations, in our view, remain attractive), as well as investment-grade corporate bonds, securitized products, and government-related securities.

“A multi-sector bond strategy may allow investors to participate in a potentially positive environment for high yield, but with the flexibility to adjust allocations to react to shifts in the market environment.”

– Stephen Hillebrecht, Lord Abbett Product Strategist

 

MARKET VIEW PDF


  Market View

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