Best Junk Bond Manager of Decade Says Recession Fears Overdone
Comment of the Day

March 09 2016

Commentary by David Fuller

Best Junk Bond Manager of Decade Says Recession Fears Overdone

Here is the opening of this topical report by Bloomberg:

Mark Notkin expected the rebound in high-yield bonds. The earlier plunge in the first part of the year is what didn’t make sense to him.

Notkin, whose $9.7 billion Fidelity Capital & Income Fund has outperformed all peers over the past decade, didn’t flinch as high-yield bond prices tumbled in January and early February. While investors feared that declining oil prices and troubles in Europe and Asia might disrupt growth in the U.S., Notkin found little evidence to support the gloom.

“We talk to hundreds of companies and nothing we were hearing led us to believe we were going to have a recession,” Notkin said in an interview at the Boston headquarters of Fidelity Investments. “Things aren’t terrific but the fundamentals are OK.”

Top bond managers have divergent views on the high-yield bond market, which slumped to more than a two year low in February before rebounding as job growth accelerated. DoubleLine Capital’s Bonnie Baha warned last week that China’s weakening economy might inflict more pain on junk-bond investors. Notkin is more bullish, expecting mid-to-high single-digit returns this year, while Pimco’s Mark Kiesel sees buying opportunities.

David Fuller's view

As someone who looks at plenty of charts, I also want to know what is behind the price action.  Lots of people have looked at incredibly low bond yields this year and concluded that the world’s largest economy is heading into recession. 

I feel that is unlikely, unless the Dollar Index resumes its advance by spiking well above 100 over the medium term.  Clearly the Fed and US Treasury want to delay that move, by surreptitious intervention if necessary, as it would greatly increase the risk of recession at a time when the global economy is also weak.  Meanwhile, low oil and gasoline prices are a huge stimulus for consumers, not least in the USA. There is also more positive deflation than many people realise, thanks to the accelerating rate of technological innovation.

 

In addition to my own opinions, I want to monitor the views of economists, investment managers and strategists who have had very good track records over the decades.  To mention just two, Roger Bootle is certainly on that list and so is Fed Vice Chairman Stanley Fischer.  I have not seen any other comments by Mark Notkin of Fidelity but I would like to monitor them going forward, perhaps with the help of subscribers.

Needless to say, the US equities and stock markets generally would be more vulnerable if the world’s largest economy slipped into recession.  Conversely, if the US economy avoids recession and continues to gradually improve, many stock markets will eventually surprise on the upside.   

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