The value style has typically outperformed when stock returns broaden, and over time active managers have fared better than passive. Classic quality value factors still seem attractively priced, and we see many “shots on goal” still available, including “growth in value” and dividend equities with rising income. To play offense with defense, we think low-volatility equities offer a solid choice in a turbulent world where return patterns matter more.
Certain segments of AI and healthcare stocks seem better priced in the growth opportunity set, so we think it makes sense to explore well-positioned companies there. In the past, when healthcare stocks reached a low point in their share of the S&P 500, rewarding returns followed.
Deglobalization plays into equity opportunities, too. Reshoring brings concern over higher wage costs, so companies could embrace AI in manufacturing and automation more firmly, as the cost of industrial robots declines. Also, as trade frictions and earnings provide tailwinds for firms outside the US, the opportunity set should expand in other regions, too.
Amid the Angst, Bond Yields Still Appear Attractive
After a momentary flattening, the midsection and long end of the US yield curve suddenly steepened in a historic move, and as questions resurfaced over US Treasury demand, long-term yields were historically unsettled. As underlying Treasury yields fell, investment-grade credit spreads stayed largely put while high-yield credit spreads noticeably widened.
Technical conditions for high-yield bonds have weakened, but fundamentals continue to provide support, with both interest-coverage and leverage ratios starting from positions of strength. Defaults are low, though we expect them to rise to 2% or 3% in the US. Bear in mind that the high-yield index is of much higher quality today, with fewer CCC issuers than before the global financial crisis.
This could make high yield an option to reduce portfolio risk by replacing some equity exposure. While macro risks could cause more widening in spreads, high yield has historically held up better than equities in terms of peak-to-trough declines during large equity sell-offs. Overall yields today are attractive—and yield to worst has historically been a strong predictor of future returns.
With yield curves diverging among major bond markets (Display), we also think it makes a lot of sense to take a global approach to scanning for opportunities. As we scan the market, global investment-grade credit and emerging-market local-currency debt are among the potential destinations for diversified fixed-income exposure.
