Note Précis Sep. 22,2023: Reflective Forbearance Appropriate – In late September 2023, equity behavior has again appeared as if instantaneous gratification could repeat the heyday of quantitative ease. The reality learned by central bankers and others experienced with the 1970s/80s has been that for impact on inflation and behavior, policy has to be tighter and for longer than initially expected. It behooves reflective forbearance of which quality and selectivity in investments are a part. Even with pauses as in the September 20, 2023 FOMC statement, we expect the Fed Funds rate to reach 6% by late 2024 and be maintained there for 12 months. Amid risks of currency volatility, it would catalyze global basis point flowthrough for other central banks,.
Actual actionable liquidity is a likely contributor to mismatch in low quality corporate and emerging country bond yields being closer to 12 month lows while U.S. 10 year Treasury Note yields have risen to 12 month highs. The changed macro environment since 2021 adds to risks already inherent in leveraged bond portfolios. Within fixed income portions of asset mix, capital market evolution is tardy, is occurring but is incomplete. Our favor remains for high quality and short duration.
The impact of higher interest rates is not linearly on capital budgeting alone but can also surprise through costs from suppliers and accentuate bifurcation within operating margins. Even amid low rates, an example was in Japan when under duress, large multinationals were forced during slow growth to demand cost relief from suppliers in order to survive. Myriad challenges appear beyond central bank policy as well. Already fissured, the fall of 2023 is important in pollical economic dialog,. After the comprehensive trade policies of the post war period, emergent now appear more fractured regional trade blocs/agreements. Operating business challenges exist across the spectrum, from concept high technology with its high multiples to the more down-to-earth of basic resources and elsewhere.
Geographical equity rotation seems classical for a period of more tepid global growth. Sectoral rotation seems again based on expecting early central bank ease and on valuation expansion. It appears driven especially by a coterie of massive Information Technology components, arguably incorporating expectations of long term annual earnings growth of 20% or more. As demonstrated many times across geographies, myriad sectors and over the decades in conglomerates, operating challenges are immense for delivery and growth from multiple lines each of great heft.
In equities at late 3Q/2023 levels, we would expect heightened volatility. We would focus on selectivity, diversification and quality of operating management, in contrast to momentum fervor on attributes like concept, low quality and high leverage. Indicating as much have been financial tribulations including those in the Financials. To achieve diversification, we would cap Information Technology weightings to 25%. E.o.e.