The Case for Taxable Municipal Bonds for Investors
If you’re a homeowner, there are probably a few things you’ve been neglecting to do. Perhaps the kitchen needs upgrading, or the roof needs replacing. We tend to procrastinate on these improvements due to large renovation costs, until it hits a point where we can’t ignore them anymore. This is the state that U.S. infrastructure has reached—on a national scale.
Today’s infographic from New York Life Investments highlights the level of disrepair in U.S. infrastructure. It also explores why taxable municipal bonds, which will finance the required infrastructure upgrades, provide such an interesting investment opportunity.
Falling Apart at the Seams
The American Society of Civil Engineers (ACSE) regularly assesses the nation’s infrastructure—things like bridges, airports, and drinking water—and scores it in a ‘report card’. After decades of neglect, the U.S. only scored a D+ in 2017.
The ASCE estimates that $4 trillion is needed to bring infrastructure up to a B grade, $1.3 trillion of which will be provided by state and local governments.
The urgent needs for increased investment in America’s infrastructure continue to grow and our nation’s economic vitality and quality of life are at stake.
— Ed Mortimer, U.S. Chamber Vice President of Transportation and Infrastructure
U.S. municipal bonds will be the primary funding source for this massive financing need. These bonds are quite popular with individual U.S. investors, as the interest income from most municipal bonds is not subject to federal income tax.
However, the U.S. tax code limits the volume of non-taxable bonds issued, and the purposes for issuing them. As a result, many local and state governments have been turning to taxable municipal bonds to finance their infrastructure projects.
The Muni Opportunity
Taxable municipal bonds are a potentially attractive investment for many reasons.
1. Competitive Historical Yield and Strong Returns
In the last decade, a lagging global economy led to historically low interest rates—many sovereign (national) bonds fell into negative territory. Taxable municipal bonds provided an alternative source of yield potential, outpacing the yields of comparable treasury bonds in some cases.
Not only that, but in the post-crisis era, taxable municipal bonds have averaged a return of 6.9% per year, beating the 4.6% performance on U.S. corporate investment-grade bonds, a staple in most institutional portfolios.
2. High-Quality, Stable Credit Ratings
Most municipal bonds are high quality with low default rates, making them attractive to risk-conscious investors.
|U.S. Municipals||Global Corporates|
|Rating Spread||Over 76% rated A+ or better||Only about 10% are AA rated|
|Tiny portion below investment grade||Nearly half are below investment grade|
|Default Rate||0.81% for those rated BAA by S&P||0.84% for those rated AAA by S&P|
Historically, municipal bond ratings have also been far more stable than that of global corporates.
3. Inefficient pricing
The municipal bond market is highly fragmented, and most issues are too small to be included in a market index.
This market fragmentation, combined with limited sell-side research and many buy-and-hold investors, often leads to inefficient pricing. Active investors have the potential to generate higher returns by applying their credit research and trading skills.
4. Low Correlations
Correlation measures the degree to which two securities move in relation to each other. In general, taxable municipal bonds have a low correlation to other fixed-income sectors. This means they help provide portfolio diversification and reduce volatility.
5. Longer durations
Since taxable municipal bonds fund long-term capital projects, they are usually financed with longer maturing bonds. Institutional investors welcome this source of long-duration assets, as they can match them up with their long-dated obligations.
A Compelling Portfolio Addition
Taxable municipal bonds have many positive qualities that make them a strong contender for investment. When added to a diversified fixed-income portfolio, they may also improve the risk/return profile.
As the U.S. begins to revitalize its infrastructure, taxable municipal bonds present a strong—and often overlooked—opportunity for investors.
How Heart Health Can Keep Your Portfolio Beating
Through thematic investing strategies lies an opportunity to invest in a long-term, powerful trend that impacts nearly one in two people: heart health
This infographic is available as a poster.
Visualizing the Big Business of Heart Health
Heart health affects almost one out of every two Americans, creating implications on both personal and economic levels. At the same time, this means that there is an opportunity for investors to get behind heart-health innovations and holistic solutions.
In this infographic from New York Life Investments, we explore this growing ecosystem and how it can benefit both the future of health and your portfolio.
Why Invest in Heart Health?
Each day, the heart beats 100,000 times—equal to a staggering 3.5 billion beats in a lifetime.
However, this crucial organ is affected by many ailments. Heart disease tops the list as the number one killer among Americans: 650,000 people in the U.S. die of heart disease annually.
In response, multiple industries from Big Tech to wellness are actively working on heart health solutions. By 2030, the cardiovascular disease tech market is projected to reach $40B, making it a growing market for investors to dive into.
Below, we explore some case studies of companies that are aligned with healthy hearts and preventative solutions.
The Fight to Detect Heart Disease
Irregular heartbeats are a key symptom of stroke and hospitalization. In fact, the most common and costly reason for preventable hospital stays is heart failure:
- 1.1M hospital stays annually
- $11.2B total annual costs
To combat this, Apple and Stanford Medicine launched the Heart Health Study to develop an algorithm that detects irregular activity.
How the Apple Heart Study app worked
- Participants wore Apple Watches that detected irregular heart rhythms, known as atrial fibrillation
- 2,161 (0.52%) were notified of irregular heart rhythms, prompted to schedule a telehealth consultation, and were sent ECG patches to wear for a week
Of these notified participants…
- 34% Experienced atrial fibrillation
- 76% Sought medical attention
Along with the algorithm’s 84% positive predictive value, the Apple Heart Health study promoted higher engagement with health services and telehealth providers. Heart health is big business, and Big Tech is only getting started.
Innovating the Tools for Living
Type 2 diabetes is another major risk factor for heart disease. To help fight against diabetes, Fitbit is at the intersection of heart health and technology with glucose monitoring.
Among the projects it has under development:
- $6 million investment in Sano, a company developing a coin-sized patch for glucose tracking
- Partnering with Dexcom to monitor how physical activity influences diabetes in a pilot program
While it’s clear that preventative tools are critical on an individual level, their impact on a community-wide scale is striking. For example, for every $1 invested in bike and walking trails, almost $3 in health costs are prevented.
Reversing the Trend: Why It’s a Good Move
A key part of preventing heart failure is to get moving—both before and after critical issues arise.
Importantly, activewear has become one of the top performing categories in fashion since quarantine took hold. As a leader in activewear, Lululemon is designing smart clothing with innovative and lightweight materials.
Another avenue they have ventured into is home fitness, with its acquisition of Mirror in July, 2020 for $500 million. Health and wellness have boomed in the age of COVID-19, and Lululemon’s shares have climbed significantly:
Price Return (2020)
- LULU: 49.6%
- S&P 500: 16.3%
- DJIA: 7.3%
It’s clear that activewear is deeply interwoven into consumer demand.
The Future of Life-Saving Strategies
The problem with heart disease is that the related costs are only intensifying.
By 2035, the direct medical costs linked to cardiovascular disease are estimated to top $748 billion, while indirect costs are projected to reach $368 billion.
But this also means that there’s a promising area of investment opportunity—with the potential for life-changing impact. As societies are hit with the twin threats of COVID-19 and aging populations, the demand for integrative heart solutions is more urgent than ever.
What Lies Ahead: 2021 Economic Projections and the Year in Review
Are 2021 economic projections looking up? As we look back on a historic year, this graphic outlines key growth forecasts for the year ahead.
What Lies Ahead? 2021 Global Economic Projections
With over 1.4 million deaths worldwide, COVID-19 has impacted nearly every corner of society.
Yet, hope seems suddenly near. Crucial vaccine developments are emerging, with many of the 320 vaccines in advanced trials. Still, questions remain around the timing and effectiveness of the potential vaccine. With this in mind, the International Monetary Fund (IMF) projects that this year, global real GDP will fall –4.4%, bouncing back 5.2% in 2021.
As we look back on a historic year, this infographic from New York Life Investments traces the notable events of 2020, along with growth forecasts for the year ahead.
2020: Year in Review
From a deadly virus to U.S. elections, how did we get to where we are now?
Since COVID-19 was declared a pandemic, $12 trillion in global fiscal response helped stabilize the economy. Despite financial markets facing their sharpest drop in 30 years, the S&P 500 rebounded in record speed—recovering losses in under four months.
|S&P 500 Price Returns||Global COVID-19 Cases|
Source: European CDC via Our World in Data
*As of November 27, 2020
In April, oil prices dropped into negative territory for the first time ever. The combination of both a demand shock and supply shock led oil futures to fall to -$37.63. Since then, oil prices recovered modestly, hovering close to $45 in November.
In another historic event, wildfires ravaged through the West Coast of the U.S., burning five million acres across Oregon, California, and Washington. Meanwhile, COVID-19 cases continued to climb. Global reported cases exceeded the 25 million mark by September.
Finally, on November 16, Moderna announced that its COVID-19 vaccine was 94.5% effective, just days after the 2020 president-elect, Joe Biden was announced.
Despite the number of record-breaking incidents over the year, the tech-dominated S&P 500 held steady. Here is how key economic figures have materialized against the backdrop of 2020:
1. Government Debt
Government debt rose 20% relative to GDP in advanced economies, while debt has grown at a slower pace in emerging market and low-income countries.
|Gross Debt Position (% of GDP)||2019||2020|
|Emerging market and middle-income economies||53%||62%|
|Low-income developing countries||43%||49%|
Overall, inflation was lower than pre-pandemic levels, sitting at around 1.5%.
While commodities and medical supplies saw their prices rise, weak global demand for overall goods cancelled out these inflationary effects.
3. Sector Performance
Service sectors were hit among the hardest as social distancing measures were enacted to stave off the pandemic.
In the first half of 2020, accommodation, arts, and entertainment sectors fell close to 15% compared to 2019. Meanwhile, banks were cushioned with cash reserves in the event of unexpected risks, breaking roughly even in year-over-year growth.
While the economy has encountered numerous challenges, the IMF expresses cautious optimism for the year ahead.
2021: Global Growth Outlook
Since the IMF’s June projections, economic growth forecasts have somewhat improved. Primarily, optimism is being driven from Q2 GDP growth that exceeded expectations.
|Global Growth Forecasts||April||June||October|
By contrast, pre-pandemic projections for 2020 and 2021 were 3.3% and 3.4%, respectively.
Over 2020, China enacted several strict measures to contain COVID-19 early in the outbreak, a key factor behind its economic momentum. Meanwhile, India is projected to rebound 8.8%—higher than any other country in 2021, according to IMF-reported countries.
While several factors remain uncertain, what will pave the way for a global recovery?
Analysis of a Successful Global Recovery
Growth projections are improving, but economic success will hinge on these three layers.
|3 Layers for Economic Success|
|1||The path of COVID-19||Public health measures & the race for a vaccine
Impact on domestic economic activity
|2||Global consumer demand||Tourism activity
|3||Financial market sentiment and capital flows||Supply disruptions
To prevent further unwanted outcomes, it will be essential that policy support is not withdrawn too soon.
The Road to Recovery
With these factors in mind, how could global conditions transform in the months ahead?
|Best Case Scenario||Worst Case Scenario|
|Accelerating global demand|
Maintaining liquidity for countries in need
Fair and equal vaccine
implementation across countries
|Weakened economic activity
Tightening lending conditions for countries in need
Country-level vaccine disparities
In the face of these obstacles, the health of the global economy rests on sufficient consumer demand, capital flows and COVID-19 containment. With news of vaccine developments underway, the outlook is appearing a bit brighter.
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