Volatility Happens Sector Webinar Slides - AAM Company€¦ · 10 Year Inflation Expectations 1 1.2...

1

Volatility Happens

AAM’s Investment Outlook Webinar

Tuesday, January 24, 2017

2

Today’s Presenters:

Macroeconomic Review and Outlook

Marco Bravo, CFASenior Portfolio Manager

Market Outlook

Reed J. Nuttall, CFAChief Investment Officer

Corporate Securities

Elizabeth Henderson, CFADirector of Corporate Credit

High Yield Sector

Scott A. Skowronski, CFASenior Portfolio Manager

Structured Products

Scott A. Edwards, CFADirector of Structured Products

Municipal Market

Gregory A. Bell, CFA, CPADirector of Municipal Products and Municipal Bond Trader

Convertible Market Overview

Tim Senechalle, CFASenior Portfolio Manager

3



4

U.S. Economic Outlook

Note: Percentages represent change from fourth quarter to fourth quarter

Source: Bureau of Economic Analysis, Bloomberg

2015 2016 2017 (est)

Real GDP 1.9% 2.0% 2.4%

Personal Consumption 2.6% 2.8% 2.5%

Fixed Private Investment 2.6% -1.1% 4.1%

Exports -2.2% 1.9% 2.4%

Imports 2.5% 1.3% 4.0%

Government Spending 2.2% 0.4% 1.2%

5

Private Non-Residential Investment

-20%

-15%

-10%

-5%

0%

5%

10%

15%

4Q/Q4 (%)

Source: Bureau of Economic Analysis

6

NFIB Small Business Optimism

80

85

90

95

100

105

110Index Level

Source: National Federation of Independent Businesses

7

Average Hourly Earnings

1.00

1.50

2.00

2.50

3.00

3.50

4.00YoY %

Source: Bureau of Labor Statistics

8

10 Year Inflation Expectations

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

2.8Rate (%)

Source: US Treasury, Bloomberg.

9

The Fed’s Dot Plot

Source: Federal Reserve, Bloomberg.

10

Market Outlook


11

Consumers Are Optimistic

40

50

60

70

80

90

100

110

120

12

/1/2

00

8

3/1

/20

09

6/1

/20

09

9/1

/20

09

12

/1/2

00

9

3/1

/20

10

6/1

/20

10

9/1

/20

10

12

/1/2

01

0

3/1

/20

11

6/1

/20

11

9/1

/20

11

12

/1/2

01

1

3/1

/20

12

6/1

/20

12

9/1

/20

12

12

/1/2

01

2

3/1

/20

13

6/1

/20

13

9/1

/20

13

12

/1/2

01

3

3/1

/20

14

6/1

/20

14

9/1

/20

14

12

/1/2

01

4

3/1

/20

15

6/1

/20

15

9/1

/20

15

12

/1/2

01

5

3/1

/20

16

6/1

/20

16

9/1

/20

16

12

/1/2

01

6

Consumer Confidence

Source: University of Michigan Consumer Sentiment Index, Bloomberg

12

Stock Market Returns Above Historical Norms

500

1000

1500

2000

2500

S&P 500

13

The Market Is Priced for Tax Cuts and Growth

10

12

14

16

18

20

22

24

26

28

S&P 500 P/E Ratio

14



15

Corporate Sector

• Fewer banks tightening standards

• 2017 indicators: Credit Managers Index remains above 50 (expansion), GS Financial

Conditions Index elevated but improved year/year

• Yield curve remains steep

• Slight bear flattener expected in 2017

Credit cycle indicators have improved

-

100

200

300

400

500

600

700

-40

-20

0

20

40

60

80

100

10/1

/200

08/

1/20

016/

1/20

024/

1/20

032/

1/20

0412

/1/2

004

10/1

/200

58/

1/20

066/

1/20

074/

1/20

082/

1/20

0912

/1/2

009

10/1

/201

08/

1/20

116/

1/20

124/

1/20

132/

1/20

1412

/1/2

014

10/1

/201

58/

1/20

16

Basi

s Po

ints

%

Net % of Domestic Respondents Tightening Standards - C&I Loans for Large/Medium

Businesses

% Tightening OAS

Source: AAM, Bloomberg Barclays Index, Fed Source: AAM, Bloomberg

16

Corporate Sector

OAS tighter with improving commodity prices and economic outlook due to monetary and fiscal stimulus

Source: AAM, Bloomberg Barclays

Basic Materials

Capital Goods

Communications

Consumer Cyclical

Consumer Noncyclical

Energy

TechnologyTransportation

Utilities

Banking

Broker, other

Finance Co

InsuranceReits

Contributors to IG Corporate Excess Returns 2016

493 basis points

120

140

160

180

200

220

12

/31

/20

15

1/3

1/2

01

6

2/2

9/2

01

6

3/3

1/2

01

6

4/3

0/2

01

6

5/3

1/2

01

6

6/3

0/2

01

6

7/3

1/2

01

6

8/3

1/2

01

6

9/3

0/2

01

6

10

/31

/20

16

11

/30

/20

16

Basis

Points

U.S. Corporate Investment Grade OAS

17

Corporate Sector

Technicals supporting spreads

Source: AAM, Bloomberg

18

Corporate SectorPrioritize risk adjusted income – Opportunities in Finance

(60) (50) (40) (30) (20) (10)

- 10 20 30 40

bps

Finance – Industrials OAS

AAM comments:

• Interest rate sensitive sectors have outperformed

• Prefer domestic banks (money center), legacy

bonds

• REIT spreads approaching cyclical tights and

REIT fundamentals have peaked

• Prefer well positioned P&C, brokers, and life

insurers

• Community banks remain interesting but must be

selective and disciplined with pricing

• Continue to avoid:

5060708090100110120

100%

120%

140%

160%

180%

200%

bps

Sub/Senior bank relationshps

Sub/Senior bank OAS Sub-sr bank OAS (rhs)

Fundamental concerns Relative value

European banks Regional banks (senior)

Australian banks Canadian banks (senior)

BDCs

Small REITs

Source: Bloomberg Barclays, AAM

19

Corporate SectorPrioritize risk adjusted income – Opportunities in Industrials

AAM comments:

• BBBs offer more value but must be selective at

lower end of quality spectrum

• Expect commodity sectors to outperform as well

as Aerospace/Defense, Towers, Railroads

• Take advantage of M&A related new issue funding

(e.g., Pharma)

• Avoid: Media (smaller networks), Cable, BBB

rated Auto/Retail, Refining, Technology, A rated

Consumer Products/Food

-

50

100

150

200

250

300

1/2

0/2

006

8/2

0/2

006

3/2

0/2

007

10/2

0/2

00

7

5/2

0/2

008

12/2

0/2

00

8

7/2

0/2

009

2/2

0/2

010

9/2

0/2

010

4/2

0/2

011

11/2

0/2

01

1

6/2

0/2

012

1/2

0/2

013

8/2

0/2

013

3/2

0/2

014

10/2

0/2

01

4

5/2

0/2

015

12/2

0/2

01

5

7/2

0/2

016

Bas

is P

oint

s

BBB-A Industrial Rating Basis

Basis +1 Std dev -1 Std dev

20

High Yield Sector


21

High Yield Market Review: A Strong 2016 as Commodities Stabilized

Source: Bank of America Merrill Lynch High Yield Indices

US High Yield Market Dataas of 12/31/2016

Description

Total Return2016 Yield Spread

Spread Change 2016

Broad Market 17.5% 6.17 422 -273BB/B Rated 14.8% 5.29 330 -223CCC & Lower 36.0% 11.06 932 -715Energy 37.4% 6.36 433 -970

22

High Yield Default Rates Expected to Decline in 2017

Source: Goldman Sachs

Bill

ions

($

)

23

Debt Service Remains Manageable

Source: BofA ML Global Research HY Market Stat. Sept. 30, 2016. JP Morgan, Markit as of Aug. 9, 2016.

24

Structured Products


25

Current Coupon Spreads

0

50

100

150

200

250

300

350

CC

MB

S S

prea

d ov

er 5

y+1

0y

Tsy

Ave

rage

Spread

Freddie/Fannie Conservatorship

QE1 Announced

Expand MBS purchases

QE1 Ends

QE2 Announced

QE2Ends

Op twist

Federal Reserve Taper announcement May 22, 2013

Source: Yieldbook

QE3Announced

26

Moody’s/Real Commercial Property Prices Indices

Source: Moody’s

0.00

50.00

100.00

150.00

200.00

250.00

300.00

12

/1/2

00

0

6/1

/20

01

12

/1/2

00

1

6/1

/20

02

12

/1/2

00

2

6/1

/20

03

12

/1/2

00

3

6/1

/20

04

12

/1/2

00

4

6/1

/20

05

12

/1/2

00

5

6/1

/20

06

12

/1/2

00

6

6/1

/20

07

12

/1/2

00

7

6/1

/20

08

12

/1/2

00

8

6/1

/20

09

12

/1/2

00

9

6/1

/20

10

12

/1/2

01

0

6/1

/20

11

12

/1/2

01

1

6/1

/20

12

12

/1/2

01

2

6/1

/20

13

12

/1/2

01

3

6/1

/20

14

12

/1/2

01

4

6/1

/20

15

12

/1/2

01

5

6/1

/20

16

Inde

x Va

lue

Date

Moody's Commercial Property Price IndicesNational All-Property

Major Markets (All-Property)

Non-Major Markets(All-Property)

27

Vintage UW Spreads

VintageOrig.Bal.

($bil.)

LoanCount

Avg. LoanSize

($mil.)

Avg. Coupon

Orig.LTV

% of Loans with LTV >74%

Orig. NCF Debt Yield

% of Loans with NCF Debt

Yield <9%

Orig. NCF

DSCR

FullIO %

PartialIO %

NoIO %

% of Loans with Additional

Debt

Refinance % / Acquisition %

2004 73.5 6,701 11.0 5.5% 68.7 43.3% 11.1% 21.3% 1.67 14.1% 29.3% 56.6%

2005 135.5 10,117 13.4 5.4% 69.7 44.4% 10.0% 47.7% 1.59 26.6% 38.3% 35.0%

2006 161.3 11,701 13.8 5.8% 69.1 42.3% 9.7% 50.9% 1.45 32.1% 41.8% 26.1%

2007 191.1 11,761 16.3 5.8% 70.0 45.6% 8.9% 64.9% 1.38 56.5% 29.2% 14.3%

2008 10.7 819 13.1 6.3% 68.1 31.5% 9.5% 46.7% 1.35 31.0% 50.1% 18.9%

2010 5.4 217 24.8 5.8% 59.2 5.2% 12.4% 2.8% 1.78 6.0% 7.1% 86.9% 20.6% 74.1 / 25.9

2011 24.5 967 25.3 5.5% 62.6 7.2% 10.9% 8.3% 1.61 8.7% 16.2% 75.1% 16.3% 74.9 / 24.8

2012 32.2 1,719 18.7 5.0% 63.5 8.1% 10.5% 18.1% 1.67 11.8% 22.0% 66.2% 10.3% 80.1 / 18.2

2013 53.1 3,050 17.4 4.5% 63.1 10.9% 10.5% 27.4% 1.85 17.0% 32.7% 50.3% 13.5% 71.9 / 26.3

2014 56.8 3,484 16.3 4.7% 65.8 18.1% 10.1% 41.0% 1.71 19.3% 43.8% 36.9% 16.2% 69.0 / 29.1

2015 61.5 4,327 14.2 4.4% 64.8 16.3% 9.8% 46.6% 1.79 23.7% 43.2% 33.1% 11.4% 69.2 / 28.6

2016 47.1 2,792 16.9 4.5% 61.0 7.7% 10.4% 37.4% 1.89 33.1% 33.7% 33.2% 15.1% 67.1 / 26.8

Q1 2015 13.1 908 14.5 4.3% 65.7 18.7% 9.6% 45.9% 1.77 23.4% 45.4% 31.2% 12.6% 61.8 / 35.8

Q2 2015 16.6 1,230 13.5 4.2% 65.2 17.5% 9.8% 50.6% 1.89 28.0% 39.6% 32.4% 10.6% 73.5 / 25.9

Q3 2015 16.8 1,139 14.8 4.5% 64.6 15.1% 10.1% 43.6% 1.79 17.9% 46.5% 35.6% 12.4% 71.1 / 27.0

Q4 2015 14.9 1,050 14.2 4.6% 63.9 14.1% 9.6% 46.0% 1.69 25.8% 41.4% 32.7% 10.0% 68.9 / 26.9

Q1 2016 11.4 716 15.9 4.7% 61.9 9.7% 10.4% 42.4% 1.82 30.5% 41.2% 28.3% 11.7% 63.0 / 33.3

Q2 2016 7.1 464 15.3 4.8% 63.0 9.4% 9.9% 36.7% 1.72 29.2% 40.5% 30.3% 12.5% 62.4 / 32.3

Q3 2016 13.1 751 17.5 4.4% 59.7 5.9% 10.7% 33.5% 2.02 33.8% 30.6% 35.6% 17.3% 68.8 / 22.6

Q4 2016 15.5 861 18.0 4.2% 60.6 7.1% 10.4% 37.2% 1.92 36.2% 27.8% 35.9% 16.9% 70.9 / 23.1

Source: Deal documents, Intex Solutions, Inc., and Wells Fargo Securities.

28

Municipal Market


29

Improved Technicals Should Support Relative Valuations

0

50

100

150

200

250

300

350

400

450

500

Tota

l Yea

rly

Issu

ance

(bi

llion

s)

Total Issuance Total Refundings New Money Issuance Estimate Issuance

New issuance supply expected to reach $350billion, down $95billion from 2016’s record level

• Substantial drop in refinancing activity will be the largest driver

• Infrastructure-related financing expected to remain in line with issuance over last 4 years

Demand expected to see gradual improvement in rising rate environment

• Very heavy reinvestment flows from call proceeds should be supportive

• Mutual fund redemptions expected to be a drag on demand flows as rates rise

Source: Thomson Reuters Municipal Market Data

30

Tax-Reform Risks Could Extend Volatility in Relative Valuations

Source: Bloomberg

31



32

Convertible Gains Were Driven By Strong Equity and Credit Markets

Source: Bank of America Merrill Lynch Convertible Research

As of 12/31/2016

Market SectorBofA Merrill Lynch VXA0 Index Weight

Convertible Sector Total Return

Underlying Equity Total Return

Energy 8.04% +27.04% +3.61%

Media 4.47% +24.86% +33.48%

Materials 2.07% +20.90% +59.10%

Consumer Staples 2.20% +16.74% +8.57%

Technology 33.93% +16.09% +20.80%

Utilities 5.32% +12.58% +15.88%

Financials 15.40% +8.98% +17.57%

Telecommunications 3.58% +8.70% +11.93%

Transportation 0.33% +6.49% +14.00%

Industrials 5.47% +4.69% +9.95%

Consumer Discretionary 3.37% +1.41% -0.14%

Healthcare 15.81% -3.56% -9.88%

Totals 100.0% +10.43% +12.19%

2016 Convertible Performance by Sector

33

Market Conditions Are Ripe For Increased New Issuance

Source: Barclays Capital Convertible Research

-$47

-$32

-$49

-$42

-$29

-$42

-$29

$25$21

$49 $49

$38$35

($60)

($40)

($20)

$0

$20

$40

$60

2011 2012 2013 2014 2015 2016 2017 (est)

Sup

ply

($B

ln)

Convertible Sector New Issue & Redemption ($Bln)

Gross Supply

Redemptions

34

Managing Risk / Return Paramount Amid Expected Volatility

Source: Zazove Associates

Zazove Institutional Blend Composite –

12/31/2016

Typical Number of Positions ~60

Number of Industry Groups 35

Average Credit Quality BBB-

Adjusted Current Yield 2.94%

Convertible Duration 1.66

Delta 0.55

Investment Premium 28.34%

Conversion Premium 28.41%

One-Year – Stocks up 25% +16.74%

One-Year – Stocks down 25% -8.80%

One-Year - Stocks down 25% & Interest Rates up 100 bps -10.64%

Equity markets will be the primary driver of returns. Asymmetric risk / return profile is compelling given

uncertain market outlook.

35

Summary


36

Issuance of Bonds Up in 2016 Offset by Surge in Demand

Source: JPM, AAM

37

Today’s Presenters:



Market Outlook




High Yield Sector


Structured Products


Municipal Market




38

Questions

Please enter any questions on the top right hand of your screen

Volatility Happens Sector Webinar Slides - AAM Company€¦ · 10 Year Inflation Expectations 1 1.2...

Documents

Transcript of Volatility Happens Sector Webinar Slides - AAM Company€¦ · 10 Year Inflation Expectations 1 1.2...