Central bank interest rate hikes seems to have had their desired effect, with signs pointing to the end of the very high inflation of late, but, according to three chief investment officers at M&G Investments, the world’s economy isn’t out of the doldrums yet, especially because of Russia’s ongoing war against Ukraine.
“I think the inflation comes down from here,” said Jim Leaviss, M&G Investments’ CIO of public fixed income, pointing to internet-based price tracking research showing that inflation is past its peak and is on a downslope. He sees “a couple of months in a row of falling prices in the US”, with “core inflation remaining relatively well-behaved”.
Leaviss said he sees government bonds are looking attractive, based on his analysis of the 10-year forward rate in the US. “We’re well above 4 percent now, compared to what people think will be the terminal rate for the Fed, something like four,” he said, speaking in a webcast on Tuesday. “So it looks like the markets pricing in (that) rates are not going to stay very high for a long time.”
US TIPS enthusiasm
Leaviss was also enthusiastic about the US TIPS market – that country’s inflation linked bond market. He stated that every maturity now in the US TIPS market is giving you a positive real yield. “You can get 1.3, 1.4 percent real yield.”
Leaviss praised the way some European governments are responding to the energy shock through capping energy prices, instead of doing fiscal transfers to people, which he said would lower the inflation rates that the population has to face. He also pointed to statistics showing that German gas consumption is 87 percent of where it would normally be all things being equal. “So we know that there’s been an impact on growth and demand from higher prices”.
Fabiana Fedeli (photo), M&G Investments’ CIO of equities and multi asset, discussed the fate of the Nasdaq index as a source of opportunities in the equities area. “What you have seen is the market is not giving credit anymore to those companies that are based on hope,” which she described as companies where earnings visibility is not clear, or is in the future, or companies that need to finance their earnings stream going forward.
“There’s clearly one area of Nasdaq where we have no visibility in earnings where there’s a need to refinance growth, which we don’t believe is a good place to park your money right now, no matter how weak this area has already been.”
Not a short term bet
Asked about a possible revival of European equities, Fedeli replied that it depends on your investment horizon, as well as on your currency hedge – European equities are more of an opportunity when trading in US dollars. She mentioned the S&P 500 trading at 20 times earnings and the DAX at 13 times, with the European bearer market 13 times forward earnings.
However, she said “those earnings are definitely still at risk”, pointing to the price of natural gas and the ongoing Ukraine conflict, with the risk of significant rationing. She noted that companies with high fixed costs are the one who will suffer the most. Anyone choosing to invest in European equities will have to be in it for the long haul, she said.
Speaking about environmental concerns at this point, in the runup to COP27 in Sharm-El-Sheikh, Fedeli expressed her view that this is a short-term/long-term issue. In the short-term, of course we have to restart the coal plants, she said. “That’s not good for the environment, but we have to do it.”
But in the longer term, she said, events have had the impact of accelerating the energy security vision, “which particularly for Europe, means renewables,” she said. “It’s not only about being greener but also about diversifying your source of energy.” She mentioned the 210 billion euro budget of RePowerEU legislation here and the 437 billion US dollar budget of the US Inflation Reduction Act.
Dry powder still there
M&G Investment’s William Nicoll, CIO of Private and Alternative Assets, discussed the wide range of responses of some private markets – real estate is slow to react, but some of the ABS markets “immediately moved quite aggressively.”
He pointed out the last time this sort of discussion was held, his topic was about the large amounts of “dry powder” – money sitting on the sidelines – waiting to be invested. “That money is still there,” he said. It’s not like we had a reverse of that.” He mentioned that some portions of the private markets are unsure about the situation because of the low level of deal flow.
Asked about infrastructure and whether he sees it differently now, Nicoll replied frankly: “No is the simple answer.” In the short term, there’s a lot of ifs having to do with interest rates and inflation makes infrastructure a good short term bet, Nicoll said.
“But if you think of it a different way, the amount of retooling that needs to be done across the world … There’s so much that needs to be spent, that there’s bound to be great opportunities coming through.”