Note Précis June 21,2023: Q3/2023 –Transitions To Selectivity and Valuation, From Yield Suppression and Momentum. We assess that more volatile currencies as well as more focus on spreads between markets are likely to extend. It would be quite different from the prior environment of quantitative ease and quantum differences notwithstanding, with shades of prior decades of restructuring and large fiscal deficits. Central banks appear focused on continuing to tame inflation. Notably, China has been an exception due to domestic pressures.
The RMB/yuan has in turn weakened against major currencies, not least the U.S. Dollar. With global growth likely to remain slow into 2024, trade tensions should hence not be brushed aside as capital market volatility generators. It is worth recalling that even between likeminded countries like the U.S., Japan and Germany back in the mid 1980s, trade tensions boiled over into currency and then capital market turmoil into 1987.
Even if not overtly stated by many central banks as being benchmark policy to be hewed, U.S. Fed Funds rates from 5 ¼ %, could reach 6% in 2024 and be maintained for 12-24 months. Capital market change is usually abrupt, not easily modelled and hence labelled exogenous.Yield suppression and momentum distortion fostered focus away from absolute considerations. Now, for instance in Europe, is British monetary policy really weaker than Italy with ECB backing but with massive troubled bank loans and political paralysis being chronic. Or in North America with U.S. and Canadian central bank rates closely aligned at 5-5 ¼ %, currency and longer dated instrument spreads appear subject to volatility. In now elevated inflation Japan, slivers of change appear of an intertwining between yield spread change and that of exchange rates. Unlike prior “as long as it takes” protestations as favoring broad low coupons, we see weak growth and inflation targeting as requiring fixed income focus on quality, on tangible coupons alongside short duration and precious metals as hedge.
On geographic equity mix in the first half of 2023, restructuring anticipation helped outperformance in Japan, the U.S. markets benefitted from a handful of Information Technology equities with tangible businesses but now elevated valuation. Despite low valuation being enthused as attractive, Europe lagged. Long term growth anticipation appears not to have led to emerging market general outperformance. A conventional rolling sequence has appeared again as being key of the U.S. consumer and leading economic rotation, followed by a lag from Europe and emerging economies providing sustenance to change once global growth has reached higher levels of close to 3 ½ – 4 % annually.
We expect that alongside diversification, lessened leverage and share buybacks as macro factors, bifurcating of operating delivery will favor quality as a selectivity variable across equity sectors. In growth, we have reverted to a cap in Information Technology to diversify with market weight Consumer Staples and overweight Healthcare. In cyclicals, we see overweight opportunities in Industrials, Materials, Energy and industrial real estate entities over consumer areas. Amid higher interest rates, we see rate of return risk in Utilities and advantages for those Financials most ruthless in restructuring. E.o.e.