Moody’s Investors Service Chief Investment Officer Credit Outlook

On Tuesday evening, Moody’s and CFA Society New York hosted the Moody’s Investors Service Chief Investment Officer Credit Outlook.

The event featured insights from some of the investment industry’s most acclaimed Chief Investment Officers, Jae Yoon, CFA, Chief Investment Officer, Krishna Memani, Chief Investment Officer, OppenheimerFunds, Dennis A. Johnson, CFA, Chief Investment Officer, Investment Management Group, TIAA.

Kathrin Heitmann, CFA, Vice President-Senior Analyst, Moody’s Investor Service kicked off the evening with opening remarks while Bjorn Forfang, Deputy Chief Executive Officer, CFA Institute provided the Keynote Address.

Organization of the event was spearheaded by Thomas Brigandi, recipient of CFA Institute’s Inaugural Global Outstanding Young Leader Award 2017, and who was recognized by Bjorn Forfang, Deputy CEO of CFA Institute, as “the most important volunteer in the CFA Institute, globally, given all of the high-quality events he has organized; I have never seen anything like it in my career.”

Topics discussed included macro themes that will shape global credit markets in 2018 and beyond, such as political risk, growth, unusual monetary conditions, trade protection, climate change and technology as well as a closer look at credit markets, which focused on the outlook for defaults, credit spreads, and sector underperformance / outperformance.

The overarching theme of the night was that 2018 is a reversion to the mean for normal market volatility, as 2017 was unusually calm. The panelists expect volatility to persist for the foreseeable future as the U.S. expansion matures and inflation and rates continue to rise.  However, huge shakeups in the market are not expected. Despite rising rates, the panelists don’t expect equities to be impacted negatively as they can perform well in a rising rate environment. However, if we see a high velocity rise in rates, equity and bond markets could have a more severe reaction causing a correction.

With wage growth currently in the 2-3% range, we are still in a healthy form of good inflation. The larger concern of the panelists is deflation.  Central banks should err on the side of easing rather than being restrictive to ensure the economy doesn’t sink back into the secular stagnation period of the past decade post crisis.

A hot topic of discussion was ESG investing and the panelists agreed that ESG is here to stay. On a global scale, economic growth is not in the west, but in some parts of Asia, Africa and Latin America, where the population continues to increase.  Even though ESG investing is becoming the norm in the west, its effects are rather meaningless given that emerging markets are the ones with a higher carbon footprint vs. developed markets.

The panelists differed in their opinions on bond investments. Credit spreads are rich but if rates don’t rise at an accelerated clip, bonds can continue to produce low but positive returns in a rising rate environment due to the coupon.  One of the panelists believes bonds are not worth the investment, given the risk.  He is investing in alternatives to fill the asset allocation piece that would typically include bonds.

When asked if there are any bubbles brewing, one of the panelists singled out the syndicated loan market as an area of concern. He is investing in middle market lending instead.

The night concluded with closing remarks by Daniel Dagen, CFA, Chief Executive Officer, CFA Society of New York.