We see the current rally as typical of bear markets. At this stage in the cycle, the biggest risks are weakening earnings and, eventually, downgrades (investment grade) and defaults (high yield). We think this is now playing out as evidenced by the many profit warnings that have been issued.
So why have markets bounced so vigorously? A dovish Fed shift, expectations for a China trade deal and the backdrop of an oversold market late last year all help explain.
In times such as these, when thorough issuer selection pays off, the market will increasingly distinguish between winners and losers. We construct our portfolios cautiously. We are also conscious of the fact that it is expensive to be underweight. But rather than succumbing to the temptation to be long for the carry, we prefer to get prepared so we can return quickly after markets have repriced.
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