Talking Markets Podcast Series (Preferreds) with Elaine Zaharis-Nikas (Cohen & Steers) & Frank Sileo (UBS CIO)
At a Glance
The desk's thesis emphasizes an optimistic outlook for preferred securities, pressing on the theme that valuations have been the primary constraint to achieving superior returns. Per the full note from UBS, preferreds in 2025 have shown returns of approximately 6% with retail-exchange-listed securities yielding around 3.6% and institutional variable-rate securities achieving about 8.3%. While current expectations mirror those of the previous year as the market adjusts, the strategic retreat of investors from overly optimistic positions suggests that preferred securities could rebound. This perspective keeps in line with the cautious positioning observed in the fixed-income landscape amidst tightening monetary policies.
Key Takeaways
- 01The preferred securities market remains buoyant despite existing valuation concerns.
- 02Returns in 2025 were approximately 6%, with significant differentiation between retail and institutional securities.
- 03The UBS Chief Investment Office's outlook for 2026 signals an expectation of stabilizing valuations and favorable risk-reward opportunities.
- 04Caution among some financial institutions suggests a possible divergence in market sentiment.
Full Analysis
What the desk is arguing
The desk is optimistic about the preferred securities market, highlighting that, although valuation constraints persist, the anticipated returns could align with last year’s levels. The UBS Chief Investment Office anticipates returns to be driven by improving valuations as we progress into 2026, pinning hopes on strong fundamentals despite potential market fluctuations due to macroeconomic factors.
The UBS analysis quantifies last year's performance at about 6% total return for preferreds, with varied performances across retail and institutional categories, suggesting a diversified investment approach could be beneficial. Continued adjustments in fixed income investment strategies may unlock new opportunities within the preferred securities sector, supporting the outlook for a favorable risk-reward scenario.
Where it sits in our coverage
We currently adopt a consensus target of 1.075 for preferred securities, with a range considered between 1.04 and 1.12. Several key firms that align with this perspective include: - jpmorgan: Target of 1.10, due March 2026 - morganstanley: Target of 1.08, due March 2026 - credit-suisse: Target of 1.12, due March 2026
This aligns closely with jpmorgan’s bullish outlook on the sector, sitting comfortably toward the upper end of our assessed targets, highlighting a generally optimistic sentiment across peer firms.
How other firms see it
Many firms, including morganstanley and credit-suisse, align with the desk's bullish view on preferred securities, emphasizing a broader support for this asset class. In contrast, firms like bofa present a more cautious stance, believing that valuations may restrict upside potential, thus placing their target at 1.04.
This discussion connects to broader movements in the fixed income markets where recent divergence in policy outlooks, particularly between the Federal Reserve and other central banks, could lead to volatility in securities pricing, impacting pairs sensitive to these developments such as the USD/EUR and the USD/JPY.
Market Implications
Watch for movement around the 1.075 target while monitoring preferred securities for signs of upward momentum. A sustained shift in central bank policy could further influence valuations in this sector over the upcoming months.
From the original
Elaine Zaharis-Nikas serves as Head of Fixed Income and Preferred Securities and a senior portfolio manager for the Cohen & Steers preferred securities portfolios. Elaine joins Frank Sileo, Senior Fixed Income Strategist Americas from the UBS Chief Investment Office, for a compre
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