Keeping You Informed: Marret

Speakers:
Paul Sandhu, President and Chief Executive Officer
Roberto Katigbak, Institutional Strategist

  • The Marret portfolios were defensively positioned from before the start of the year, with large weights in government bonds and cash. This was based on the view that the global economy would experience a cyclical slowdown later in 2020. Given weak economic data, we felt that consensus estimates for global economic growth were overly optimistic.
  • In addition, we felt that the risk/reward in corporate credit was unattractive, given very tight credit spreads and high corporate leverage. We reduced our corporate credit exposure over the past two years, replacing it with higher-duration government bonds given our view that weaker economic growth would prompt central banks to lower interest rates.
  • Our portfolio positioning protected investor capital through the coronavirus-related market drawdown. With valuations for corporate bonds having corrected immensely, we now believe it is time to selectively rotate back into corporate credit.
  • Clearly, we expect a severe shock to the economy, but we see the current recession as driven by a single event – the virus-related economic shutdown. As a result, it is likely to be shorter in duration and shallower than an end-of-cycle or structural recession.
  • The government fiscal and central bank monetary policy responses to this shock have been extremely aggressive. Most central banks around the world have moved interest rates to zero, which benefited our government bond holdings. They have also introduced policies to support credit markets to ensure that good, sustainable businesses will not fail because they cannot get access to financing.
  • The combination of valuations, the event-driven type of recession and the aggressive monetary and fiscal and monetary policies introduced by central banks and governments have contributed to our view that now is the time to add credit to the funds. We have taken advantage of the market volatility over the past few months to cautiously add credit to our portfolios to varying degrees.
  • We expect credit spreads to tighten through the back half of 2020. Our initial focus has been to add shorter-dated, high-quality credit in companies with bullet-proof balance sheets that can withstand the economic shock. We have also ensured the funds have cash and are relatively liquid so we can pivot quickly to take advantage of opportunities as they arise.
  • As active managers, we have the opportunity to reduce risk assets if they become fully valued again, and the portfolios have the flexibility to hold a wide variety of cash and fixed-income securities.
  • Within government bonds, we have moved our positions toward the middle of the curve, as we expect yields for longer-dated bonds to increase as governments issue new bonds to pay for the current fiscal policies.
  • We are not expecting a “V-shaped” recovery. Rather, we are expecting a slow recovery, with economic activity normalizing but remaining weak in the fourth quarter of this year. The outcome and the path of the virus remains uncertain, and markets should remain volatile until there is more clarity.
  • Our long-term outlook is for a low yield, low inflation, low growth environment for the next several years. This goes beyond the virus – credit, population and productivity growth are all significant headwinds to economic growth at this time. As a result, interest rates are likely to remain low for a very long time.
  • In times of insecurity, actively managed fixed income can provide capital gains and total returns given its negative correlation to equity.

Source: Marret Asset Management

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Published April 16, 2020.