The effort to reduce inflation to the Federal Reserve's 2% target got an encouraging boost with a recent reading of a 0.3% increase. While caution and skepticism still abound, most consumers are positioned to service their debt, Janus Henderson investors said recently during its Global Investment Summit 2024.
At Janus Henderson's Tuesday summit, experts from the global asset manager discussed how inflation affects investment decisions and asset allocation.
Mainstream press has characterized the current inflation environment as a "disaster story" but macro data does not support a lot of those conclusions, John Kerschner, head of securitized products at Janus Henderson said during the summit panel on inflation, rates, and central bank policy, when the firm's leadership and key portfolio managers shared mid-year outlooks for their respective markets.
"I know where some of these articles are coming from," Kerschner stated, adding that data from the New York Federal Reserve Consumer Credit Panel, based on a national sampling of Equifax's credit report data, reflects delinquencies in auto and credit card loans.
"I don't want to minimize the fact that, on the margin, there are consumers that are hurting because of inflation," Kerschner added, pointing to higher costs for food, gas, and insurance.
Part of Janus portfolio managers' response is to be selective about how much auto ABS it adds to its portfolio. The auto ABS sector only has $225 billion outstanding, compared with around $1.6 trillion in loans outstanding. ABS represents only a fraction of all auto loans.
"Our analysts are doing due diligence work with issuers and figuring out what deals are best situated to survive a downturn," Kerschner said. "That is what we are buying and putting in our portfolio."
In a separate panel tackling the macro outlook, Jim Cielinski, global head of fixed income, said although inflation is sticky, long-term inflation expectations are very well anchored, which has allowed certain risk markets like corporate credit to embrace a soft landing.
Also, yields and income are more attractive than they have been for a long time. This could counterbalance a short landing, which is negative for the bond markets, Cielinski said.
"Consumer resilience is the underlying strength of the global economy in the face of higher rates," he said, which is a big surprise.
The multi-sector approach
Meanwhile, John Lloyd, who leads multi-sector credit strategies, said that plenty of exciting alpha opportunities exist in dynamic asset allocation.
"Areas we are most excited about are the relative value between securitized and corporate credits," Lloyd said. "If you look at corporate credit, it is near all-time tights at this point of the cycle."
In securitized credit, specifically, the agency mortgage market is trading near the wides relative to corporate investment grade — all falling within the quality assets of the securitized product.
Opportunistic investors could get new-issue. triple-A CLOs at 140 over the spread. By comparison, investment-grade triple-B corporates have a little over a 100 spread, and the investment-grade corporate market has an 85 spread with a much longer duration than the triple-A CLOs.
"Those are two areas we like," Lloyd said.
According to Lloyd, they also like the current value in some areas of the CMBS market, "where the baby has been thrown out with the bath water." Some pockets of CMBS are trading extremely wide and have positive fundamentals, including industrials, multi-family, and a subsector within the office space: life sciences, which includes the growing healthcare and biotech areas.
"There are a lot of opportunities in multi-credit portfolios to generate alpha from the mismatch in pricing between the sectors," Lloyd said.
