During the UBS CIO Global Forum in New York on Thursday, investors in attendance were polled on when they thought the bull market would end.
Most of them —60% — believed it would be over within the next 2-3 years, or by 2021.
And so, chances are they were listening attentively when the markets and investing panelists were asked about their best-conviction ideas over the next 6-12 months.
Here’s what they said:
Michael Fredericks, head of income investing for the BlackRock multi-asset strategies team: Short-term bonds.
Fredericks described himself as a “bond apologist” as he was the only one out of the five panelists to make a recommendation on the bond market.
He agreed that buying long-term government bonds may not be the best idea now, given the prospect that inflation could rise and eat into the returns on that investment.
His preference is for short-term bonds such as collateralized-loan obligations (CLO), the securities that earned a bad rap after the financial crisis for bundling risky mortgages into products investors could buy. Fredericks, however, recommended the highest-quality AA and AAA-rated CLOs.
Additionally, he saw non-agency mortgages, floating-rate bank loans, and preferred stock as attractive because they would earn more coupon as short-term rates increase.
“If I told that we had two-and-a-half, three-year maturity profiles with yields of over 5%, with 20% of the volatility of stocks, I think that looks outrageously attractive right now for more conservative investors,” he said.
Jeremy Zirin, head of investment strategy, UBS Wealth Management Americas: US financials
Besides short-term bonds, rising interest rates would also benefit US financials, Zirin said.
“I think that in the financial sector, you have reasonable valuations,” Zirin said.
He contrasted the sector with technology, which he said traded at about a 15% premium to the broader S&P 500 — a 10-year high. “Tech has outperformed everything and tech has reasonably good fundamentals still,” he said. “The problem is the price you pay for that.”
He saw tech as a sector that’s underperformed and underdelivered. The “steady drumbeat” of deregulation should also boost the sector, Zirin said.
David Bianco, chief investment strategist and head of US active equity management, DWS Americas: Big US banks and emerging-market growth stocks
Bianco narrowed his recommendation in financials to big banks, which he said hold “the best value in the world.”
One issue that could plague small, regional banks is the flattening of the yield curve, which occurs when the gap between the short-term interest rates at which they borrow and the long-term rates they use to lend shrinks.
“We do think the [yield] curve continues to flatten as the Fed hikes, so big banks, not small regional banks,” Bianco said. He added, “I think we’re all going to be surprised by how low long-term yields stay.”
He cited growth stocks as his top recommendation, and urged US investors to look elsewhere for opportunities in emerging markets.
Joseph Harvey, president and chief investment officer, Cohen & Steers: commodities and infrastructure
Cohen & Steers specializes in investing in real assets including real estate, infrastructure, natural-resource equities, and commodities.
And so, it’s no surprise that Harvey’s recommendation was in commodities and infrastructure. Beyond the Trump’s administration’s plans to increase infrastructure spending, Harvey forecast that investments across the world would grow as well. “I think the alternative is to stop thinking about the world across geographic lines and start thinking across the world,” Harvey said.
He noted that the portfolios of major investors such as endowments typically have most of their allocation in fixed income and equities, with 20%-30% in real assets. That’s because they aim to get the return of stocks, yet provide diversification and some inflation protection.
“When we look at investors outside sophisticated ones like endowments, allocations to real assets are generally pretty low,” he said.
Colin Moore, global chief investment officer, Columbia Threadneedle: Mid-stream pipeline companies
This subset of infrastructure is attractive after a down cycle triggered by the 2015-2016 crash in oil prices, according to Moore.
“Think return potential [in the] mid-teens, 6-7% dividend yields, 4% growth, and multiple expansion as these companies continue to finance the shale revolution and the energy independence for the United States,” Moore said.
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