Moderator: Dave Goodsell, Executive Director, Natixis Center for Investor Insight
Marina Gross, EVP, Portfolio Manager, Natixis Advisors
David Lafferty, SVP, Chief Market Strategist, Natixis Investment Managers
Elaine M. Stokes, EVP, Portfolio Manager, Co-Head of Full Discretion Team, Loomis, Sayles & Co.
Gina Szymanski, Director, Co-Portfolio Manager, Real Estate Securities Group, AEW Capital Management
Goodsell: As we enter 2020, what three things are top of mind?
Gross: Customization, outsourcing and ESG. We are seeing a move from one-size-fits-all investment products to solutions that are far more customized and even personalized to individual investors. The data available to us to customize along the lines of tax management, ESG integration, and even indexing is a lot more standardized and uniform.
More and more institutional and wealth management investors are also willing to outsource investment decision making because being an investment manager is far more time-consuming, costly, and complex than it’s ever been before. In order to make the business and the math work, you have to find operational efficiencies in other places. One way to achieve that is to outsource either part of or the whole investment management process. Finally, ESG is becoming a much more opportunistic part of the investment process as opposed to a traditionally defensive one.
Szymanski: After the best total return year for Real Estate Investment Trusts (REITs) since 2014, our REITs outlook for 2020 is a little less robust, with expected total returns in the 7%–8% range. Secondly, in terms of sectors, we see the biggest growth in niche residential sectors like single-family rentals, as well as manufactured housing. We also see strong growth in industrial, as well as data centers. We see the weakest growth from lodging, self-storage, and retail. Third, the E in ESG has been a big driver for real estate. When investments are made to improve efficiency and sustainability of real estate, it improves the cash flows as well as the liquidity of the assets. So we think ESG is not just a headline for us, but it’s good for real estate, period.
Lafferty: Long-term effects of massive quantitative easing. Lack of catalysts. And a so-so economy. I worry about the long-term effects of massive quantitative easing, and zero and negative interest rate policy. I wonder if we’re creating a generation of investors that hasn’t seen a bear market and doesn’t think one can exist. I’m also worried that we are systematically pushing investors out the risk curve into portfolios that aren’t appropriate for their risk tolerance. Second, the usual obvious catalysts that we write about – Fed movements, commodity imbalances, or oil shocks – aren’t obvious today. So my fear there is that something is going to fill that vacuum. Third, the so-so economy. I think the economy will do okay, but not great. I think equities will put up a positive return, but not a big return. I think bonds will clip their coupon. I think they’ll do okay.
Stokes: First off, what is the right policy to combat slow global and US growth? Are we using the right policy? I think the answer is no and that we’ve gone as far as we can go with monetary policy and cutting interest rates, and negative interest rates. Next, how does the growth we’ve seen in private debt and the bank loan market play out in the next recession? This is going to be this decade’s lesson on liquidity. The bank loan market is now one where more than three-quarters of the deals are not part of the high yield market, so they’re new, small companies. We need a correction here to see what happens, and I’m really concerned about that.
Finally, I really worry that we have populaces around the world who have elected autocrats and nationalists, and we’re moving towards less globalization, less cooperation. And the biggest issues that the globe is facing long-term are going to be cybersecurity and climate change, things that affect everybody and no one country and region can solve. You need everybody’s cooperation to make a real impact.
How do you think volatility will affect the markets in 2020?
Lafferty: I think volatility has been abnormally low and I don’t know when it’s going up, but I think the veil of central bank omnipotence has to be pierced. Central bankers in 2008 sort of saved the world, but at some point we have to realize that, no, they can’t fix every single problem and markets need to naturally clear.
Stokes: We are starting to see volatility within my everyday trading. You’re seeing Triple C bonds really underperforming and oil going one way while gas is going the other. And you’re seeing the markets maybe getting a little bit more efficient in how they’re pricing things. Now, overall levels need to move down, but we’re starting to see the differentiation.
Gross: There’s a ton of liquidity in the market because, in general, market participants are very underexposed to equities – the proverbial cash on the sidelines. Rates are still low, the Fed is kind of accommodative and on hold, and those are really powerful forces that, in our view, will keep volatility still kind of within range and in check.
Where do you think interest rates are headed and how might they affect your portfolios?
Stokes: When I think about the Fed, the bar is extremely high for them to raise rates. However, we would have to see significant inflation, which we’re not seeing. I think we’re going to have more of the same, more of that trading range on rates. I’m going to make my bets in my portfolios by taking advantage of those dislocations, those one-off bouts of volatility, particularly in the credit markets. Whatever it might be, we’re going to be there to pick up on those opportunities, and spend less time worrying about the interest rate environment.
Szymanski: I think the Fed will remain data dependent and in their on-pause mode pretty much through 2020. One of the potential risks to that thesis would be a sudden signing of a China/US trade deal. That could potentially reaccelerate GDP growth, and if that happens maybe the Fed reacts to that. When we think about how we’re positioned, real estate is somewhat like bonds. When you think of the underlying leases, some have long leases – 10, 15, 20, 25 years; others have very short leases. And so, depending on the duration of the real estate that you’re owning, you can actually hedge a portfolio against changes in interest rates.
Many institutional investors told us they think a market correction is imminent. Do you?
Szymanski: Only now have we finally gotten back to an average level of supply on the commercial real estate side. Now supply equals demand and supply is starting to taper off. If that trend continues, this will be the first time in history that supply has peaked prior to the onset of a recession. Usually we go into a recession and supply is in excess of demand, and we’re not seeing that this cycle.
Lafferty: If you just look at the volatility, a correction is always more likely in equities. That’s not a macro call, that’s sort of a math call.
Stokes: I think a correction is going to be caused by policy, but it’s going to be trade policy, currency policy. Those are the two weapons right now and they’re being used for political gain more than anything. I think it’s there that we’re going to see the move that eventually puts us into the recession. How that translates, and which market goes first, I don’t think matters, because I think we’re at a point now where if one market goes within the country, they’re all going to go.
What impact, if any, do you see the 2020 US election having on the markets?
Lafferty: At the end of the day, I think the presidential election is less of a story than it’s made out to be. Where it’s really important is in the places outside of legislative issues, like the bully pulpit, currency policy, trade policy. They can do a lot there, but it feels like legislatively there’s still going to be a ton of sand in the gears.
Gross: I think what really matters is the makeup of Congress. The president, whoever he or she may be, has a limited ability to get legislation done without support from Congress. In my view, politics in a developed nation doesn’t have lasting effects on the economy.
Stokes: To me, it’s more about how we show up on the world stage. Do we show up as a leader? As a cooperator? As a collaborator? Or do we show up as a country that thinks they can do everything on their own and becomes very isolationist and nationalist?
Given everything we discussed, what’s your projection for the S&P 500® Index in 2020?
Lafferty: Up a little bit
Stokes: Up slightly
Read the Natixis Global Survey of Institutional Investors: Ten market trends institutional investors are watching for in 2020
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S&P 500® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.
Quantitative easing, also known as large-scale asset purchases, is a monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy.
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