The Asset-Backed Securities (ABS) market contains many different types of securities backed by different assets. So to understand the outlook for asset-backed securities, investors need to look at examples of how these asset pools will perform in 2023. The latest research from ABS investment managers inside RFPnetworks suggests that the outlook for Asset-Backed Securities in 2023 will be mixed. Some ABS segments may do well. Whereas some ABS segments may face headwinds.
Examples of Asset-Backed Securities with a positive outlook
In general ABS investment managers seem comfortable taking short duration consumer related ABS exposure. Despite immediate recessionary pressures, labour markets remain tight, wage inflation is the norm, and the consumer finances are in much better shape than the pre-GFC period. This is leading to strong demand for pools of assets that are exposed to both student loans and car loans.
Examples of Asset-Backed Securities where the outlook is mixed
Commercial Mortgage Backed Securities (CMBS) are at the longer end of the ABS duration timeline. Investing in these specific asset-backed securities requires expertise and selectivity. The circle of covid, working and shopping from home has 'irreversibly' impacted the demand for office and retail real estate. This makes the risks and returns on these pools of long duration assets less predictable. There are exceptions which can accessed via Single-Asset Single-Borrower deals (SASB), which is why highly active managers are getting all the calls from investors today.
What is clear is that investors will continue to be interested in asset-backed Securities in 2023. But not just for yield and the strong covenants that bind deal originators. The outlook is also being driven by many other factors that solve issues within Fixed Income portfolios that bonds are unable to solve.