Main Street versus Wall Street: why the consumer is king in securitised credit
If you believe aspects of the markets are in the later stages of a credit cycle, picking your spots can be quite advantageous. We contrast corporate debt or equity (what we call “Wall Street” finance), with the US consumer and housing finance (what we call “Main Street” finance).
One of the beautiful things about the universe of securitised debt is the diversification it provides and the ability for investors to pick their spots. If you believe aspects of the markets are in the later stages of a credit cycle, picking your spots can be quite advantageous. We believe Quantitative Easing (QE) has distorted financial markets and many traditional asset classes have become quite expensive. We contrast corporate debt or equity (what we call “Wall Street” finance), with the US consumer and housing finance (what we call “Main Street” finance). We think the latter appears to be in very good shape, making consumer-driven segments of securitised an attractive alternative to traditional income-generating investments.
Given the conditions today, including the regulatory environment for consumer lending and banks, and the growth in corporate debt issuance, Main Street is in better shape than Wall Street. With this landscape, we think the consumer, housing and real estate debt is a more attractive way to seek income, return, and diversification using an asset class that many investors often overlook. We’d argue that it is critical to keep three key factors in mind:
- the potential for change in policy
- level of leverage in the different sectors, and
- the level of outstanding debt and issuance.
In doing so, we believe we can identify a defensive core allocation among more consumer-driven areas of the market and earn income while avoiding exposure to investments with imbalances, high valuations, weaker fundamentals and high sensitivity to shock as policy changes.
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