What were the key issues for pension funds in Q4?
US pension market quarterly
2022: Ten issues that defined the year
Bull-markets are born on pessimism,
We believe investors need to be prepared for an extended period of higher rates as inflation makes its slow journey back to the Fed’s target. We see recession risks as still finely balanced, and believe credit investors need to be diligent, cautious and ready for volatility. In our last quarterly we discussed the topic of the Fed “tightening until something breaks”, and it increasingly appears that, from an international perspective at least, the US dollar may prove to be the catalyst for the “break”. Fed policy has helped drive the US dollar to levels unseen since the Volcker era, a significant problem for other global central banks.
After a four-decade trend of falling rates on a secular basis, the Fed Funds rate is back above the peak that occurred in the previous hiking cycle (in December 2018). This the first time this has happened since 2000 (where rates rose slightly more than they did in the mid-90s). However, it is clear the Fed is not done. Markets are priced for rates to continue rising to a peak of around 4.75% in mid-2023, before declining. Although markets are searching for a dovish pivot, in our view the pivot, when it comes, will simply be to a less hawkish tone, and that rates will plateau through 2023 rather than being cut.
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A combination of rising yields, declining equity markets and a strengthening US dollar made 2022 an extremely challenging year for many investors.
Despite this, pension funded levels improved over the year.
Latest pension news and funding update
02. pension news:
Fitch Ratings have concluded that US state and local pensions are unlikely to face a UK-style liquidity crisis as leveraged strategies are not commonly used in the US, and there has been the largest multi-employer rescue to date.
Assessing the landscape in credit markets
Without extreme monetary stimulus, we believe fixed income should offer more certain returns. Utilizing a more flexible approach to active credit management could potentially allow enhanced returns by embracing BBB credit as the center of gravity for an investment grade allocation.
The return of attractive long-term income-based returns
04. MARKET outlook:
A combination of rising government bond yields and widening credit spreads
drove absolute yields back to levels similar to those before the global financial crisis. For the first time in years, credit markets potentially offer a way to achieve long-term return objectives via income alone.
the key risks to our views
05. key risks:
A policy mistake by the Fed could raise the risks of domestic recession; spiraling food and energy prices could increase global geopolitical uncertainty; in Europe, economic activity is expected to contract, but rates are headed upward, potentially deepening the economic pain and spilling over to the global economy.
a deep dive into the Chinese economy
We take a deeper look at the long-term growth outlook for China. The pandemic response has caused a period of severe economic volatility; corporate and local government balance sheets have become impaired; and the property sector appears to be in a structural slowdown that could last for years. This has led to fears of a balance-sheet recession.
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