Viewpoints

Defensive Versus Cyclical: The Blurring Lines

Bond investors will need to be very selective due to recent changes in sector credit quality.

For credit investors, the equity market can be an important source of information about growth expectations, and at times can serve as a leading indicator. However, recent developments in some defensive sectors  traditionally favored by equity and credit investors alike during periods of slowing growth  have led to a decline in credit quality. At the same time, some cyclical sectors, which are typically favored in higher-growth environments, have improved in credit quality.

As a result, we think bond investors need to be very selective on sectors and individual companies at this late stage in the business cycle.

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The Author

Jelle Brons

Portfolio Manager, Global Investment Grade Credit

Lillian Lin

Portfolio Manager, Investment Grade Credit

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Past performance is not a guarantee or a reliable indicator of future results.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index.

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