After a review of January market returns, co-hosts Jeffrey Sherman and Samuel Lau are joined by fellow DoubleLine portfolio manager Jeff Mayberry to discuss their outlooks for securities and ideas on asset allocation for 2022. Mr. Mayberry foresees a relatively benign economic backdrop (7:35) this the year, with positive GDP growth, particularly in the second half of 2022, and inflation likely to moderate to 3%. However, he adds, if inflation persists above 5%, the Federal Reserve would have to tighten more aggressively. Mr. Lau (17:31) observes that “inflation has been high enough, persistent enough (that) it’s made its way to wages, which are sticky. Ultimately, they’re probably going to make their way up the employment chain.” Mr. Sherman sees politics at work behind the Fed’s turn from dovish to hawkish monetary policy. “The Fed,” Mr. Sherman says, “cares more about inflation, not because of the Fed’s mandate, but because politically, that’s what the (White House) administration cares about.”
In terms of asset allocation, given a Fed so far bent on tightening and markets pricing in tighter financial conditions, Mr. Lau recommends (28:30) fixed income investors focus on quality, paring back on high yield corporate bonds in favor of investment grade corporates with strong fundamentals and less reliance on debt. He also likes floating-rate assets like collateralized loan obligations and non-Agency residential mortgage-backed securities. For an investor’s corporate exposure, Mr. Sherman likes a mix of 60% IG and 20-30% bank loans given their floating rate coupon and the rest in selective high yield names. Turning to equities (38:36), Mr. Lau expects U.S. equities to produce positive returns, but he notes that European stocks are starting to play catch-up. Mr. Lau says emerging markets equities could become a “top-performing region in 2022,” although he advises investors to practice patience, giving time for uncertainty over the macroeconomic environment and interest rates to moderate. Mr. Mayberry says (39:59) U.S. stocks, especially large-cap growth stocks, are expensive based on CAPE ratios versus European stocks. “It may be time,” he says, “to peel back a little U.S. exposure and move into Europe.” Mr. Sherman advises equity investors, especially those with heavy exposure to U.S. stocks, to “watch real yields. Real yields are what drive multiples, not nominal yields. And that’s what you’ve seen transpire. This has been a big real yield move,” which has compressed valuation multiples. This episode of The Sherman Show was recorded Feb. 2, 2022.
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