Here, they share perspectives for 2019 – along with how they are actively selecting securities and managing durations, spreads and sector allocations across global fixed income markets.
First off, what is your global income outlook for 2019?
Service: As we move towards 2019, we think a renewed confidence in global growth, combined with credible monetary and fiscal policy measures, may help take pressure off emerging market (EM) and European risk assets. Disappointment, however, could prove disruptive.
Strong earnings in 2018 provided global corporate credit investors with confidence to stay the course. We anticipate the vast majority of corporate industries will maintain stable credit fundamentals. However, late credit cycle behavior, such as accelerated mergers and acquisitions activity or an overly aggressive US Federal Reserve (Fed), could induce volatility.
But, overall, we are still positive on the credit outlook across the three major markets – euro, sterling, and dollar. Also, we think that strong momentum in the US looks more likely to stick in the quarters ahead relative to the rest of the world. As such, the Fed looks likely to stay on its current course of gradually raising the fed funds rate.
Do global trade issues remain a big concern?
Schweitzer: There are lingering concerns. US and China trade tensions continued to simmer in 2018, with more products from both countries being subject to new tariffs. We do think growth in China still looks set to slow moderately due to tighter financial regulations and environmental cleanup efforts. We don’t expect a sharp rise in debt-financed fiscal initiatives by China as seen in the past, but we do anticipate some modest easing of regulatory clamp-down efforts to help offset the rising downside risks to growth from the tariffs. As a result, we continue to take a defensive posture on currencies in the region.
On a brighter note, the US made some progress on the trade front. The Trump administration agreed to a cease-fire in its trade war with the European Union (EU). Finally, in the late hours of September 30, 2018, the US reached a compromise with Canada on a new trilateral trade agreement to replace NAFTA.
Brexit is scheduled for March. How might it impact markets?
Schweitzer: Brexit overhang is certainly hampering the UK. Unknowns for that corporate market should continue to linger. We are expecting elements of contentious negotiations, both within the UK and with the EU, to be a driver for the UK and possibly the broader European asset markets as we head into the first quarter of 2019.
After some turbulence, are you finding value in currencies?
Service: We think foreign currencies, including those of emerging economies, now offer attractive long-term valuations relative to the US dollar, but cyclical and technical factors are not nearly as favorable. That said, Fed policy and US economic growth should support the strength of the dollar for the near term.
What is your overall investment approach?
Schweitzer: We are trying to identify undervalued securities worldwide and create diversified portfolios. Our broad global universe includes corporate credits, asset-backed securities including mortgages, and government, quasi-government and agency securities. We also have the flexibility to invest in sectors not represented in the benchmark, such as high yield credit and EM debt, which we view as additional alpha levers. But being benchmark-aware managers, our main emphasis is on investment grade securities.
As active managers, what do you see as alpha drivers?
Service: Credit selection and sector allocation are key alpha drivers for our strategy. We rely heavily on Loomis Sayles’ global research platform to inform our decision, especially in today’s low yield, Fed tightening landscape. We also believe managing duration and yield curve positioning can be meaningful sources of return. To that end, we are currently being defensive and maintain a short duration positioning in the major developed markets where central banks are removing accommodation by raising interest rates or tapering asset purchases. Finally, currency selection is another alpha lever for us.
With such a vast universe, how do you determine the best place to be?
Schweitzer: As Scott mentioned, Loomis Sayles research is critical. We combine bottom-up fundamental research from our credit research group, as well as the input of our traders. And that input is combined with our top-down macro views and overall risk management. So we're deciding how much overall risk we want to take, and where we want to take it. We're looking for the best sector ideas, and the best bottom-up security selection ideas.
Where are you eyeing value today?
Service: We continue to see select opportunities in financials. We think that insurance companies and banks have done a lot of the regulatory shoring up of balance sheets that they needed to do since the financial crisis. And on the margin, higher interest rates are actually good for banks. We also think securitized credit assets are offering a nice yield pickup for short-duration assets.
Overall, our global bond strategy emphasizes undervalued investments with strong underlying fundamentals and return potential. With the security selection expertise we have at Loomis Sayles, we believe we are well-positioned to deliver on that.
Diversification does not guarantee a profit or protect against a loss.
All investing involves risk, including the risk of loss.
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.
Alpha is a measure of the difference between a portfolio's actual returns and its expected performance, given its level of systematic market risk. A positive alpha indicates outperformance and negative alpha indicates underperformance relative to the portfolio's level of systematic risk.
Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers. Natixis Distribution, L.P. is located at 888 Boylston Street, Suite 800, Boston, MA 02199. • 800-862-4863 • im.natixis.com