Kristina Hooper, chief strategist at Invesco, understands that the endless debating about interest rates seems a bit excessive, “but back in the day, investors had to guess what was going to happen to interest rates by looking at the thickness of Alan Greenspan’s briefcase”.
“Merry Pivot!” writes Hooper in a post on LinkedIn, minutes before she speaks to Investment Officer. The message refers to several Federal Reserve dot-plots, and possibly meaningful adjectives in Jerome Powell’s responses during the press conference following Wednesday’s interest rate decision.
Hooper, formerly with Pimco and Allianz Global Investors, currently holds the highest position as a strategist at Invesco, based in New York and responsible for interpreting the market, economy, and equity strategy of the asset manager with over $1,500 billion under management.
In her role as global strategist, one topic has figured prominently in the outlook, white papers, and other commentary since 2021: interest rates. Asked about the relevance of that debate, Hooper says: “Despite the information overload in the current era, estimating interest rates is more relevant than ever.
Key factor
“There is simply a glut of information. So the best thing I can do is help clients determine what is important and what is not. And a lot of that is just looking at history,” says Hooper.
According to Hooper, interest rates and monetary policy have had an inordinate impact on markets since the financial crisis, mainly due to lack of fiscal measures. And while we may be coming to the end of this - very lucrative for investors - period, interpretation of interest rates remains crucial, according to the strategist.
“Until interest rates return to the level where central banks can leave interest rates unchanged for a long time, monetary policy will remain at the forefront as more or less the main factor influencing the market.”
IO: Besides interest rates, what is the most important issue for 2024?
KH: What we really need to focus on now is the lagged effects of monetary policy. We are looking at economies that have already experienced significant tightening and expect the full impact has yet to be felt. So I expect a “bumpy landing” in the first half of the year, not necessarily a soft landing, given the aggressive rate hikes.
So I do not expect a broad or major recession, but we will see parts of the economy come under great pressure, we are already seeing a big increase in bankruptcies and increasing credit constraints.
IO: What does that mean for investors?
KH: Markets are really looking forward to a recovery in the second half of next year. That means more demand and exposure to areas that have historically performed well in economic recoveries. We prefer cyclical stocks, small-caps and emerging market equities.
The US economy has proven to be more resilient than that of Europe or the UK, but that does not matter much for equities. That fact does matter, I think, for fixed income, so we focus more on investment grade credit. We are not excluding European investment grade bonds, but we are emphasising US corporate bonds.
IO: Invesco underweights US equities. Why?
KH: Given the strong performance of US markets we simply a correction, if only because investors have to rebalance their portfolios eventually. I think there are good reasons to want exposure to European equities. These will outperform US equities as far as we are concerned.
Of course, valuations are much more attractive in Europe. European equities have much greater cyclical exposure. So I think they will benefit from that, and we will see good performance especially in the first half of the year.
IO: It is rare for European equities to outperform US equities, why is that different in 2024?
KH: The prospect of European equities outperforming their US counterparts may seem like a break with historical trends, but if you look back at periods when the JP Morgan Global Manufacturing PMI was rising like now, European equities consistently outperformed.
While this is a tactical choice, the potential for a recovery in the second half of the year suggests that European equities could outperform. Incidentally, we are positive on US tech stocks.
IO: Why are you considering tech stocks in your US equity portfolio?
KH: The reasoning behind considering tech stocks within our underweight position in US equities lies in the evolution of the technology sector.
In the late 1990s, tech was seen as an area of high-quality growth. It is now considered a defensive asset class because of its secular growth qualities and as a hedge against economic downturns. The maturity of several tech companies, some of which are now paying consistent dividends, reinforces this defensive characterisation.
IO: An interest rate forecast in conclusion?
KH: The June dot plot implied 1 per cent cuts for 2024,the September dot plot implied a 0.50 per cent cut and the December dot plot shows an implied 0.75 per cent cut for 2024. In my view, that is certainly more realistic than the September estimate, although I think the probability of a 1 per cent cut is higher.
Last week’s interest rate decision may go down in monetary history as the Great Pivot of December 2023. In my opinion, the announcement and press conference clearly show that interest rates will no longer rise. To me, it even sounds like higher interest rates will be very transient - a holiday gift from Powell to the markets. Merry Pivot!
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