Big-Picture Insights from the Loomis Sayles Alpha Strategies Team
On Thursday, March 12, Loomis Sayles’ Alpha Strategies team held a conference call to discuss current conditions, upcoming challenges and potential portfolio positioning and solutions. In case you missed it, each speaker summarized a few key points.
The big picture
“Big picture, markets are currently dealing with three issues: the impact of COVID-19, the disease caused by the coronavirus, on the global economy, an oil fight and a crisis of confidence in Western governments’ handling of the current situation. Each of these issues can contribute to credit issues, a big deflationary impulse, recession worries, challenging market returns and a grab for liquidity.
I expect markets to be very reactive over the next few weeks. Markets are interrelated and correlations have been changing. For example, earlier this week we saw the Treasury market sell off along with the risk markets. For now, we’ll seek to protect capital and look for attractive entry points to help achieve long-term return potential.
I’ve been looking at credit markets in two buckets; energy is in one bucket, and the rest of the market is in the other. Low-quality energy has traded as much as 40 points over the last week, and even investment grade energy is starting to get pressured. The rest of the market was trading until yesterday morning, when even high-quality investment grade spreads blew out and liquidity dried up.
In these markets, we’re doing our homework. We’re stressing company balance sheets, examining which companies could survive for six months and generate positive free cash flow. We believe we’ll be ready for any potential opportunities once we turn the corner.
What to watch
Looking forward, we believe US second quarter GDP could fall below -1.5%. This is the first large-scale crisis for private debt, so we’re watching this market closely. We’re also watching for the government response to the crisis. We believe Western governments need to re-establish credibility to build confidence, and we think emergency measures will be critical for liquidity. We don’t believe payroll tax relief is the answer. Without a policy response, we may be at risk of massive layoffs, credit deterioration and even bankruptcies.”
- Kevin Kearns, Alpha Strategies Portfolio Manager