With a central scenario based on corporate liquidity levels at highs, a high pent-up demand willing to spend after months of savings, and that historically that consumption capacity has been reflected in inflation, a central point right now on the lips of all managers and investors, the vision of this manager is that, although inflationary pressures may be temporary, it is necessary to clarify what “temporality” refers to and emphasize that it can refer to 12-18 months…. With what we would not be talking about a couple of months as the consensus is inferring. An important nuance that is worth highlighting, and consider that in recent times very low interest rates have prevailed due to low inflation and that the scenario could be somewhat higher inflation levels, although not double-digit as in the 70’s.
Regarding tapering and rate hikes, the message from the Fed last week stands out, which has shown that last summer it could begin to give signals about the gradual withdrawal of bond purchases and that the Fed very possibly begins in the last months of 2021. Historically this process has lasted between 8 and 12 months, reaching the end of 2022. Once the tapering is finished, approximately 36 months later, it would open the door for the first increase in interest rates, with which we would be talking of two increases in 2023, points out Mario González.
Based on a panorama of asymmetric economic growth, with a global economy with 4 main engines: China, the United States, Europe and Emerging countries, and considering that “Capital Group managers do not invest thinking about styles or geographies”, stood out to the market of Japanese, where is easy find leading companies in various sectors and where there is also a significant improvement in corporate governance, which is influencing constant inflow by foreign investors.
Under these premises, they focused on the different asset classes:
In fixed income:
Starting with less risk, which would be corporate bonds are more cautious, where spreads and valuations are tighter, and would be the asset most sensitive to interest rate rises. Although there are opportunities in the energy and telecommunications sector, as well as utilities, always in global portfolios.
In HY you can find more opportunities. It is the fastest growing and where credit quality has improved a lot, very diversified with the presence of more sectors that have issued. They are positive because the default ratio is at normal levels (2-3%), active with less duration and therefore less affected by potential rate hikes. There is not much travel at the level of spreads but with the yield around 4% if that supports.
Emerging fixed income: there is a long journey, an asset very sensitive to the economic recovery and asset flows. It is a market with high returns, around 5-5.5%. They bet on HY and local currency issues.
“Fixed income has a value in portfolios, a diversifying factor and with opportunities for active managers”, Álvaro Fernández pointed out. With a rate hike scenario, there may be investors who are tempted to abandon fixed income or not include it as another silo in a portfolio diversified. But from Capital Group they consider that within the asset class there are opportunities to be exploited, such as HY and emerging debt.
In equities: Value or growth …… at Capital Group they don’t see investments through that binary lens of Value or growth, since they consider that timing between these two binary styles is complicated. In recent years, the recovery to November was led by a small market niche, which creates some inefficiencies. Now there are more companies that are doing well. The most cyclical companies continue to do well after an opening of the economy and pent-up demand….
We have experienced two years of technological innovation, and it is foreseeable that the next decade will see the evolution of this technological innovation, which is transversal in all sectors, even in those where its use was limited until the pandemic, such as healthcare. For example, electric cars are constantly evolving and as a sustainability priority. There are new companies besides Tesla that are breaking into electric cars strongly, changing their business models and facing other disruptions at the same time, such as the semiconductor supply chain. But as previously commented and González mentions it again “We do not invest thinking about styles or geographies, but in great ideas of tomorrow”, with which they bet on diversified portfolios. They ended by mentioning the increase in the payment of dividends, after several months of contraction due to the impact on corporate profits to which they were subjected by the pandemic, as well as by restrictions from regulators.