Stick To Muni Basics
Investors should be making the appropriate portfolio realignments in order to help insulate future performance from the effects of a recession
We can say with confidence that cyclical behavior will most assuredly bring about economic contraction at some point, although we do not envision the next recession as being nearly as consequential as the great recession of 2008/2009. Many municipal bond investors may neglect to review their holdings on a systematic basis, thus potentially jeopardizing portfolio returns, credit quality, liquidity and diversification.
While it is critical that state and local governments provide the necessary resources to fund basic essential services, they must also show a demonstrated commitment for their General Obligation bonds and we also believe that there must be proven support for other types of pledges. We understand that budgetary flexibility becomes challenged when revenues fall and expenditures rise and that pension funding tends to have a crowding-out effect, but the responsibility to make timely payments of principal and interest should not be compromised.
Climate change and threats represent a growing investment consideration for those affected areas of the Country. Bond disclosures surrounding climate change need to get better, and if the institutional buyers demand more transparency as a condition of support then they may show improvement. Another area of concern that has gained ample attention in 2018 and 2019 and that will merit greater focus and investment consideration moving into 2020 and beyond centers around cybersecurity challenges for municipal governments and their enterprise units. The risks to municipal credits are rising, particularly where cyberattacks are fueled by financial gains.
As a way to address possible cyberattacks, municipal governments are engaging expert cyber consultants to establish formal training sessions intended to stave off such criminal activity. Data-back-up protocols, application of anti-virus software and consistent use of variable passwords are very constructive, but additional cyber-protection measures must be utilized in order to combat the technological advances now identified in cyberattacks.
For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Advisor.
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Oppenheimer Credit Rating System:
Outperform (OP) - The analyst thinks that the security will outperform the average totalreturn of similar securities over the next 6 – 12 months.
Market Perform (MP) - The analyst thinks that the security will match the average total return of similar securities over the next 6 – 12 months.
Underperform (UP) - The analyst thinks that the security will underperform the average total return of similar securities over the next 6 – 12 months.
Not Rated: (NR) Oppenheimer does not rate the security.
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