Continued market volatility and a transition from low yields to rising rates are at the top of institutional investors’ outlook for the new year, according to the Natixis Investment Managers Global Survey of Institutional Investors.* To gain additional perspectives and delve deeper into how these factors may impact portfolio construction decisions, Natixis gathered a group of credit, equity, and volatility specialists at a 2019 Institutional Outlook event in New York City. Highlights from their insightful conversations are shared below.

Our Panel Responses

Andrea DiCenso
Andrea DiCenso

Portfolio Manager, Multi-Asset Credit Loomis, Sayles & Company

Volatility may be persistent in 2019
Andrea DiCenso believes the year 2019 will be one to watch for several reasons, citing market volatility and trade policy concerns at the top of her list. “Looking back over the last 12 months, what we’ve seen is really persistent volatility, and we’re probably going to see it tick even higher,” she said. “Volatility will probably be in US interest rate markets, if not all global markets, in a persistent way through 2019.”

Trade policy top of mind
DiCenso thinks the changing face of global trade is going to be a harbinger of growth. “Trade is going to really set the path of growth, where the Fed policy is going, the direction of the dollar, even commodity prices,” she said. “The thing that I find the most unnerving about trade policy is there’s no single variable that you can be watching to understand how it’s going to unfold.”

CCC High Yield Bubble May Pop
Another area of concern she sees is a potential bubble in the CCC high yield bond segment where US corporate debt is issued by constituents with a high yield credit rating of CCC. “CCC high yield is a market that people were willingly putting money into, where your expected loss did not even cover the yield that you were earning on a daily basis,” DiCenso warns. “So, that starts to beg the question: Are we in this euphoric period where the easy money is just really flying into this market, without doing your homework, without doing your due diligence?”

Value opportunities
Backups in emerging markets in 2018, as well as in high yields caused by an energy sector sell-off this fall, have created select value opportunities, DiCenso believes. Within the equity space, consumer discretionary stocks may outperform as they tend to do in the late phase of the business cycle.

Element of surprise
When asked what may surprise investors in the new year, DiCenso points to a spike in inflation. “An inflation spike is not currently priced into the market. So should you see a resurgence, there could be market turbulence.”
Andrea DiCenso

Andrea DiCenso is a Vice President of Loomis, Sayles & Company and Co-Portfolio Manager for the credit asset and world credit asset strategies. She is also a senior strategist for the alpha strategies group and oversees all FX and commodity activity for the firm's multi-asset product suite, and is primarily responsible for asset allocation, idea generation, portfolio construction and risk management. Since 2009, Ms. DiCenso has been a strategist within the alpha strategies group, implementing emerging market and commodity related themes within the long-only and multi-asset products at the firm. She joined Loomis Sayles in 2006 as a junior analyst covering the investment grade and high yield commodity related sectors. Ms. DiCenso began her investment industry career in 2003 at Fidelity Investments as a financial analyst. She earned a BS in finance from Bentley College and an MBA from Northeastern University.

D. David Jilek
D. David Jilek CAIA®

Vice President and Chief Investment Strategist Gateway Investment Advisers, LLC

Volatility could go beyond 2019
David Jilek expects volatility to remain in the market for some time. “The volatility conditions that have existed over the past few months are likely to persist in 2019, and perhaps throughout, and even beyond 2019,” said Jilek.

He believes there are three key phenomena that are likely to continue to ignite volatility. “Fed policy, fiscal policy, and the most important driver is where we are in the business cycle, with the market probably pricing in a deceleration phase of the earnings cycle,” he said.

Volatility can be a stock’s friend
Volatility is not necessarily all doom and gloom. In fact, Jilek sees some opportunities for investors who can stomach rocky markets and stay invested for the long term. “It is possible for the equity market to kind of climb a wall of worry, and put up attractive returns, but investors may have to endure higher levels of volatility in order to get those returns,” he added.

Option hedging for volatility
Because volatility is cyclical and the option market tends to consistently overprice volatility, Jilek believes it’s times like this where hedging with options can be particularly useful. “Because you get more cash flow from option writing, that could potentially deliver more protection if a bear market or market downside of any magnitude materializes, but also if the market continues to trend up,” he said.
D. David Jilek, CAIA®

David Jilek is Vice President and Chief Investment Strategist of Gateway Investment Advisers. His responsibilities focus on key opportunities to promote Gateway’s low volatility equity strategies by providing insight on the equity and options markets to the firm’s institutional, sub-advisory and financial intermediary clients.

Prior to joining Gateway in 2014, Mr. Jilek was a vice president and investment strategist at Natixis Global Asset Management. He was responsible for assessing capital market trends, working with affiliated portfolio management teams and assisting external clients with the firm’s investment platform. Prior to joining Natixis, his experience included investment product management and development roles at Evergreen Investments, American Express Financial Advisors and Putnam Investments. He currently serves on the Board of Trustees for the Sean D. Biggs Memorial Foundation.

David Jilek received his BA from the University of Kansas and has been in the investment industry since 1998. He holds the Chartered Alternative Investment Analyst (CAIA) designation and is a member of the CAIA Association. In addition, he holds the Retirement Management Analyst (RMA) designation and is a member of the Retirement Income Industry Association (RIIA).

M. Colin Hudson
M. Colin Hudson CFA®

Partner, Portfolio Manager and US Investment Analyst Harris Associates

Value stocks could stage a comeback
Colin Hudson believes 2019 could be the year value investing comes back into favor. “As we look at our universe of stocks, we think stocks are very cheap and we see a lot of value in the market,” he said. “We think next year can be a good year for value investors.”

Buying opportunity for value investors
Hudson said volatility can be an opening for investment managers to find hidden gems. “As active value investors, we welcome volatility in that it gives our analysts a chance to find stocks that are meaningfully undervalued,” said Hudson.

Treasuries appear attractive
On the fixed income side, Hudson sees safe-haven Treasuries fairly attractive for the new year. “Over the last six months, Treasury yields have come up quite a bit,” he said. “With the widening of credit spreads and Treasuries back to a reasonable level, we think they’ll provide a reasonable return.”
M. Colin Hudson, CFA®

M. Colin Hudson is a Partner, Portfolio Manager and US Investment Analyst at Harris Associates L.P. Previously, he served as a vice president and director of research at Hilliard Lyons Asset Management and as an investment analyst at Wallington Asset Management. He joined Harris Associates in 2005 and has 21 years of investment industry experience.

Mr. Hudson received a BA from DePauw University, and an MS and an MBA from Indiana University. He is a CFA® charterholder.

CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.

Natixis Distribution, L.P. is a marketing agent for the Oakmark Funds, a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by addiliates of Natixis Investment Managers.

Volatility management techniques may result in periods of loss and underperformance, may limit the Fund's ability to participate in rising markets and may increase transaction costs. Business Cycle: A repetitive succession of changes in economic activity. The typical business cycle has four phases: expansion (recovery), peak, contraction (decline), and trough. The Bear Market Morningstar® category contains funds that invest in short positions and derivatives in order to profit from stocks that drop in price. Because these funds often have extensive holdings in shorts or puts, their returns generally move in the opposite direction of the benchmark index.

*Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research in October and November 2018. Survey included 500 institutional investors in 28 countries.

All investing involves risk, including the risk of loss. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

Natixis Investment Managers does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions.

Natixis Investment Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, L.P. and Natixis Investment Managers S.A. This material should not be considered a solicitation to buy or an offer to sell any product or service to any person in any jurisdiction where such activity would be unlawful.