About this episode
In this episode, members of the Investment Research team including Chief U.S. Economist Lara Rhame, Managing Director, Investment Research, Rob Hoffman, Director, Investment Research Kara O’Halloran and Director, Investment Research Andrew Korz gather to discuss their predictions for Q2 2021 and reflect on a few of their Q1 outlooks.
Transcript excerpt:
Kara O’Halloran (00:05):
Welcome to Fireside, a podcast from FS Investments. My name is Kara O’Halloran, I am Director on our Investment Research Team. We have the whole gang together today, my whole team is here for our first research roundtable episode to discuss our outlooks for the second quarter of 2021. With us is Andrew Korz, another Director on the team. We have Lara Rhame, our Chief U.S. Economist, and Rob Hoffman, our fearless leader, the head of our research team. Hi everyone.
Andrew Korz (00:36):
Hello.
Lara Rhame (00:37):
Hey.
Kara O’Halloran (00:48):
To set the stage a little bit, it is March 26th, so the end of the first quarter is upon us, which means our team has been busy thinking about and writing about what’s to come in the next few months. Before we get into all of that though, I thought we could go around and talk a little bit about how things are going so far this year. We have put out outlooks pretty consistently. We each also published a chart book with our top predictions for the year, which means that everything we have forecast and said is on paper, so let’s check our work a little bit. I want to know one call that each of you made coming in to 2021 that you are particularly proud of or that we have seen play out. And then something you’re kicking yourself about, something you were off on or you didn’t specifically call out that you wish you had. Lara, we can start with you.
Lara Rhame (01:39):
I’m really so much more eager to talk about the calls that I’m proud of then what went wrong. But since you put me to task, proud of my conviction of yields were going to move higher in 2021. So far, that’s been spot on and I think there is more to come. Kicking myself for, this is a painful one. Last year, my outlook for 2020 included being bullish on the energy sector, which was relatively cheap and a good place for value investors to capture gains but clearly COVID crashed straight into that idea. And when I rewrote the 2021 outlook, I wanted to reframe it, rerun it, but I got cold feet at the end of the day. I wish I had charged through and I am kicking myself for that one for sure.
Kara O’Halloran (02:34):
I feel like we’ve all done just kind of roll forward our old work. I think it’s impressive that you decided to come up with some new things. Rob, how about you in credit markets?
Rob Hoffman (02:48):
Sure. I think looking back at our chart book, which we wrote in early December and published in the middle of December, I think one of the things that we can be most proud in terms of calls was that the senior secured loan market would start to see consistent inflows. That was a market that from October of 2018, really through the end of last year, had $90 billion worth of retail outflows or some astronomically large number.
Rob Hoffman (03:23):
That market had not seen sustained inflows in a really long time. I think a little bit on the backs of the interest rate call, even though loans are really more anchored toward short-term rates, felt that if the intermediate to longer term part of the rate curve moved higher, that would cause people to look towards floating rate assets and we’ve definitely seen that. The loan market has had something like $11 billion worth of inflows now in 2021. This is the first time in three years that this market has really started to see it.
Rob Hoffman (03:57):
And it was definitely something that in early December when we made it, I’m not sure a lot of people were really focused on it and it’s happened. In terms of things that we didn’t get right, we tried too hard, we were just too accurate. No, I am always well aware that it’s extremely difficult to predict. One of the things we talked about loans out-yielding high yield and I think that’s one that may end up not being accurate for this year. As rates move up, the high yield bond market, the yield in the market could go up, even though spreads may tighten.
Rob Hoffman (04:40):
I’m sure we’ll talk more about that later, but with the loan market, you’ve seen this really strong demand, which we called but that’s inevitably going to push down your yield and because loans are anchored to short-term rates, which we don’t really expect to go up, the yield for that market is likely to go lower because of that. I think, it may be one instance where we may not get that one right on the year.
Kara O’Halloran (05:04):
All right. Still nine months, we’ll see.
