The technology-driven environment in which we now operate and the speed with which information flo...
The technology-driven environment in which we now operate and the speed with which information flows, practically assured us of a 'frontline' position as the coalition forces moved into Iraq.
This speedy access to information has increased the ability of investors to react to news and has certainly contributed to higher levels of volatility around this crisis.
While I do not wish to belittle the risks faced by the servicemen in the Gulf, we as investors face our own risks in the current climate ' investment risks. We need to be aware of these risks and our ability to add value to our clients stems from how well we manage these risks.
Morley's approach to identifying these investment risks is based on a combination of top-down and bottom-up analysis. Looking from the top down we get a broad picture of how the economy is moving and what impact this is likely to have on various sectors within the economy.
Our core view is for a good resolution to the conflict in Iraq. We expect this to be followed by a gradual economic recovery in the long run, which should be supportive of the overall corporate bond market, especially the lower end of the investment grade market, represented by BBB-rated credits and cyclical industries.
Consequently, we have held a small overweight exposure to this segment of the market during the last few quarters.
We believe in many cases, companies are deleveraging to reduce their gearing and the demand for corporate bonds remains very strong, with modest supply anticipated in the near future. Finally, we expect government bond markets to sell off.
Around this core view we have a number of additional risk scenarios. These include the possibility of a more protracted war in Iraq where the outcome is less favourable for the coalition forces and also the possibility that a loss of consumer confidence hampers economic recovery.
We are now seeing some of our risks unfold in the short-term as the war progresses, including softer economic fundamental data than expected.
This analysis has resulted in us only running a small overweight position in BBB assets, despite our more positive core view.
The next stage involves the bottom-up process of selecting the individual bonds that go into portfolios.
Our team of dedicated credit analysts plays a key role in identifying the companies with strong balance sheets and healthy cashflows that will best implement our strategy, while minimising the risks at the stock selection level.
We believe that we are currently well positioned to avoid many of the risks that may arise in the short-term as a result of unfavourable events in the Middle East.
We expect to add yield to portfolios by increasing the small overweight exposure to BBB-rated credits and by selectively using the high-yield market when more sustainable signs of a recovery emerge.
Outlook points to gradual recovery.
Lower debt favours corporate bonds.
The supply of corporate bonds remains light.
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