A monetary policy mistake is now a very big risk about which markets are not taking sufficient account. Tightening at the wrong time could trigger a recession. The first half of the year was very positive, but you also have to dare to take profits. Inflation will be more persistent than generally assumed. Caution is therefore advised.
Value will continue to outperform, and you should avoid loss-making technology companies. This is the essence of the views of Vincent Mortier, vice head of asset allocation at Amundi expressed in a podcast in French on our sister website investmentofficer.be.
“I honestly don’t understand the drop in US long-term interest rates from 1.7 percent to the current level of 1.25 percent. Underlying inflation will be more persistent than the Fed says, for many reasons. Inflation will be well above the Fed’s targets in the coming years as growth returns to its long-term potential. The yield curve has flattened with the idea that inflation is temporary and growth will remain strong,’ Mortier explains. “We think the market is too optimistic, because inflation in wages, housing and commodities will continue, and inflation is also being imported from China.”
Policy error
Mortier warns that the Fed could make a big monetary policy mistake. He argues that it is possible that the Fed will tighten up at a time when growth slows. “This scenario is becoming more likely day by day. This will send the global economy into recession, but the stock or bond markets are currently not prepared for this at all. Caution is therefore advised. In our view, US long-term interest rates should be above 2 percent in the next six months. A major bond correction cannot therefore be ruled out.”
Neutral
Mortier is neutral stocks in a diversified portfolio, but is very selective in terms of regions, segments and sectors. Passive management is not an option for him at the moment. Mortier is therefore more likely to bet on floating-rate bonds, or short-term bonds that are held until maturity, and only in issuers without default risk.
The expert also thinks that the rotation to value and cyclical stocks is not over yet, on the contrary. “For example, European banks in particular are not expensive. Cyclical stocks also remain interesting. I would avoid deep value, but there is a lot of quality within value.” It is also interesting to bet on traditional sectors that benefit from ESG improvements.
Relatively speaking, investing in China and Asia is interesting in the long term, but Latin America should be avoided. “In China you can still find real positive interest rates. The valuations are also much more interesting. The PboC has been much more orthodox. There has been no QE and the debt is under control. Today you buy growth through China which is much cheaper than in the US, and the regulatory risks have already subsided because Chinese technology stocks were already regulated.”
Mortier concludes that anyone who invests before retirement and has many years to go will achieve a much better return by investing in high-quality growth companies in combination with emerging markets than investing everything in American technology companies.
To avoid
Mortier concludes that there are a number of segments that investors should avoid at this time. Bitcoin has already fallen by half, and the SPACs have also corrected.
“However, there are still segments that are very expensive, such as unprofitable technology companies. Many companies continue to conducts IPOs in the US, whether or not in the form of SPACs that are very expensive. There is also a lot of cheap, leveraged money in the market looking for quick profits that disappear just as quickly. Many greentech companies are very expensive. There are good companies in it, but there will also be many bankruptcies. It’s a matter of separating the wheat from the chaff.”