Fixed income is the star asset to invest this year, says Juan Luis GarcÃa Alejo, general director of Andbank Wealth Management. The intense rise in interest rates applied by central banks to combat inflation once again strengthens the issuance of States and companies as a classic placement for capital and savings, just as it was before the era of free money that has experienced the economy in the last fourteen years.
Elena Domecq, deputy director of Strategy at J.P. Morgan Asset Management for Spain and Portugal; Elena Nieto de Magriñá, Director of Vontobel Asset Management and Oscar Esteban Navarro, Sales Director for Spain and Portugal at Fidelity International. The four financial experts have participated this week in the Dialogues in La Vanguardia on the most recommended investment strategies for the next two quarters.
“The financial conditions experienced between 2008 and 2022 have changed and we have new references. Nominal interest rates have returned to being positive, as should be normal, and strategies have had to be adjusted to this scenario,” says Juan Luis GarcÃa Alejo.
Central banks are the major players in global finance as guarantors of the macro-prudential aspects of the economy such as inflation and growth. “Now –says the director of Andbank Wealth Management- we have experienced the fastest rise in interest rates in history to combat inflation and banks are also beginning to be more restrictive in granting credit. We must therefore think that it is inevitable that this will take its toll in the form of lower growth and even recession in the medium termâ€.
The impact of monetary policy takes time to be transferred to the real economy. “We have been surprised – he adds – by the strength of the economy this year. We do not know when the recession will hit but it is very likely that it will hit the US first and then Europe if the current tightening of monetary policy is sustained. There is a 60% chance that the United States will enter a recession within a year and a 45% chance that Europe will. Stock markets are pricing in a mild recession, while the bond market is reacting as if a stronger and longer growth contraction is in store. We think that, indeed, the stock market underestimates the risk of a strong recessionâ€.
Until recently, the possibility of a recession in Europe was also 60%, but pessimism has been decreasing thanks to the drop in the price of natural gas, the fact that the energy supply is guaranteed for the next winter campaign and the non-escalation of the conflict. Ukrainian war. The great hope, in his opinion, is that the Chinese giant grows at a higher speed than expected, after the covid crisis, and can act as the engine of global activity.
From J.P. Morgan AM Elena Domecq believes that central banks are almost at the end of the interest rate hike cycle. Inflation is still high in the United States, although it is starting to drop there, and it is particularly problematic in the Eurozone. Here the main problem is core inflation, which refuses to fall. “For all these reasons,” she says, “we anticipate that the Federal Reserve still has an interest rate rise of 0.25 basis points left, while the European Central Bank would have 50 basis points of increases left.”
The market consensus expects that once interest rates peak then they will come down quickly. “But we – affirms the board of J.P. Morgan AM believe that they will remain high for a while, until central banks have absolute certainty that inflation is under control.
It also considers that from now on banks will reduce credit and that this will imply a further reduction in economic growth to very moderate levels. “However, we do not see – he points out – a scenario of recession in the short or medium term, although this risk has more and more possibilities”.
Elena Nieto de Magriñá, director of Vontobel Asset, points out that small and medium-sized companies in the United States are beginning to suffer from the tightening of financial conditions, since it is not attractive to obtain financing at levels of approximately 7%, which is the type of interest of 5.25 applied by the Federal Reserve plus the bank differential. “It is a situation – she affirms – that will inevitably lead to a recession. We believe, however, that the landing will be soft, with two quarters of negative growth, and that it can be overcome without excessive problemsâ€. She adds that when short-term interest rates are higher than long-term interest rates, historically there has always been a recession. “And we are precisely – she says – in that evolution of the interest rate curve”.
In Fidelity they consider that we are already reaching the maximum of increases in interest rates. Óscar Esteban’s opinion is that the drastic rise that has been registered, however, will cause a temporary slowdown in developed countries that will end up bending inflation downwards. “Surely the Federal Reserve will raise another 0.25 basis points. It won’t go any higher but it won’t go any less either unless the recession is a hard landing. The European Central Bank, in our opinion, should not raise its interest rates any further, although it may raise them again at the next meeting.”
All the participants in the Dialogues in La Vanguardia agree with Óscar Esteban that the lower economic growth that is expected will cause a slowdown in corporate profits that will have an impact -albeit limited- on equities in the United States and Europe. The Fidelity manager, on the other hand, points out that there will be great opportunities in China and the rest of Asia because his expansive monetary policy will boost growth.
Fixed income, on the other hand, after having suffered greatly last year, offers great opportunities to reinvest in it after more than a decade in which it has not been profitable to do so. Óscar Esteban gives as an example of this fact the popular attraction that Treasury Bills have aroused. But all the participants agree that there are more interesting options in which to invest in fixed income.
“Fixed income is also starting to make a lot of sense for us in our asset portfolios –says Elena DomecqThe internal rates of return (IRR) are once again very attractive. It can be a cushion if equities fall. Treasury Bills have a very interesting coupon but fixed income offers a very broad set of opportunities. As of today, we have a preference for credit with a high credit rating and also for public debt, both American and Europeanâ€.
“I also agree,†he says, “that profits are going to suffer. Zero profits expected at Standard companies
Elena Nieto recalls that the objective is to preserve the capital and make it grow. “To do this, we must be very selective in the selection of companies in which we are going to invest and choose those that have been able to generate benefits in any situation, as is the case, for example, of companies in the health sector or, and more specifically, of Visa Mastercardâ€.
Juan Luis GarcÃa Alejo affirms that Treasury Bills, although they have become fashionable among some investors, have little tax attractiveness. “At Andbank we have better alternativesâ€, he points out. He agrees with everyone that company profits will undoubtedly drop this year. Therefore, he advises betting on fixed income this year, much more than it was in 2022, and having less exposure to equities, positioning itself especially in defensive sectors and quality companies, since in American equities there could be a correction. When asked how much the stock market could drop as a result of this correction, the Andbank manager points out that a 5% correction is feasible.
Elena Nieto, from Vontobel, also warns that there will be a lot of volatility and, therefore, there may be scares. “Careful then,” she says.
You have to be alert.” In fixed income, with an environment of high interest rates and less financing, you have to choose quality credit and short duration to be better protected.
“The idea is to remain cautious in multi-asset portfolios –says Elena Domecq- although there are opportunities. We are especially committed to high-quality and defensive strategiesâ€.
“It is evident –says Óscar Esteban- that if there is a general drop in profits it will appear on the stock market. For this reason, our advice is to also bet on quality companies and, especially, on dividend aristocratsâ€. He believes there may be great opportunities in Asian equities instead with China leading the way. “Of course – he adds – you have to bet on fixed income and the possibilities it offers this year. The current complex situation, in any case, makes it necessary to have a good financial advisorâ€.
In equities, all the participants insist on investing in very defensive sectors and in companies that have shown great resilience in the crises we have experienced. Among these sectors, utilities (public service companies), services in general, industry, health and finance stand out.
