The Chief Investment Officer (CIO) of the management company J. Safra Sarasin Sustainable AM, Philipp Bärtschi, has a very clear vision of the market despite the many uncertainties hanging over it. It reveals a firm commitment to a soft landing scenario for the economy, in which the political issue is not the main one, justifying that the time is still good to invest in certain fixed income assets , in gold and on the stock market.
Is the market too optimistic about the soft landing scenario?
The market is clearly buying a lot of good news and anticipating a soft landing. But I don’t think that’s too optimistic since we think that’s the most likely scenario. The economy will slow down a little, yes, in the coming months. Markets will move in a range with valuations so high that they will require improvement in estimates.
Do you think the market needs improving earnings estimates to maintain these valuations?
Yes. For markets to continue moving forward, we need upward revisions to estimates or at least confirmation that current forecasts are realistic. Growth of 15% is expected for next year and it is difficult. There is a risk that this growth will actually be between 0 and 5%. Analysts tend to overestimate.
Is it now the macro the main catalyst for the markets?
THE macro It is still a key catalyst for markets because it indicates the cycle and whether the economy is speeding up or slowing down. It is true that there are times when we know better what the economy is going to do and other times when there is more uncertainty, like now, with a cycle very determined by supply and bottlenecks. strangulation.
Do you think that now the macro?
Yes, this analysis is now made easier again. Beyond specific information, there is now a clearer general vision. One of the most important points for me right now is the US labor market, as the Fed has essentially cut rates in the face of weakness in the labor market.
One of the key points to watch now is consumption in the United States
Do you see a greater correlation between the labor market and consumption?
Generally speaking, the American economy is showing great strength and the risk of recession is lower, mainly thanks to the fact that consumption remains very strong. However, in recent months the latest confidence data has been called into question, as it will fall further if unemployment rises. This is why it is one of the key points to watch out for from now on.
The debt yield curve has corrected in almost all countries. What does this tell us?
This tells us that the market believes that central banks will be able to lower interest rates and that is why we believe that the short end of the curve will go down and the long end will go up. The market is therefore counting on this soft landing. If you opted for the recession scenario, the long part of the curve would decrease.
At the last meeting, the Fed cut rates by 50 points, something we have only recently seen in times of panic. How do you interpret it?
They realized that there was some weakening of the labor market and, therefore, they believe that the level of monetary restriction is too high at 5.5% and, taking into account the latest inflation data, they made this decision.
Do you think that central banks already consider that they have inflation under control?
Yes, they are quite confident, or at least that’s what they tell us. Their forecasts include inflation well below 3%. The key question is whether inflation will be there in the medium term if a soft landing is achieved with rate cuts, which could lead to a new wave of inflation in the second half of next year . It will also be necessary to see if the inflation targets are moved and if rates above 2% are accepted.
Would you say that central banks have succeeded, thanks to their monetary policy, in controlling inflation?
There is still debate over whether they achieved this through their action or simply because the supply chain disruption was resolved and, even if they had done nothing, the result would have been very similar. I think they started late and must have done it too aggressively. I think they are very reactive and data dependent and lack long term vision.
Fears that the market will react with fear of a sharp rate cut
Do you think they’re worried about how the market will react if they cut rates too quickly?
Yes, I think they are worried that the market will react with fear to a big rate cut. This is why they prefer to proceed in a gradual and predictable manner. A good example is the Swiss National Bank, which has already made cuts in March, June and two weeks ago, very predictably.
Would it be nice to also have a tool like the dot plot?
To be honest, I think dot plot This doesn’t really help because it doesn’t fit very well. It’s a forecast, and it’s interesting for the media but nothing more, there is generally a lot of dispersion. The ECB already makes its growth and inflation forecasts and that tells us a lot more.
Is speech the tool Lagarde uses?
I don’t think she is very clear in her speeches and, in any case, she talks about the next meeting, but not beyond. They depend on data. There are limits to what they can predict and sometimes it might be best if they don’t say too much.
Is the political question now the main risk for the United States and Europe?
In market terms, this usually doesn’t have a big impact. For example, in France, stock and bond markets fell a few days after the elections, as did the euro. But in a few weeks everything recovered and few people still talk about it. In Europe, there are always elections nearby. In the United States, there is discussion about what will happen to the markets if Harris or Trump wins, and there are all kinds of arguments. They obviously have influence over assets such as bonds due to their long-term economic strategy and debt sustainability. Ten years ago, southern countries like Italy, Spain and Portugal caused a lot of concern. Today, they are doing the best, which is reflected in the bonds. Before, France was considered almost as safe as Germany and now Spain seems perhaps more stable and with better prospects.
We favor curved sections between 5 and 10 years old
Given the bond curve, is it time for investors to extend durations?
In recent weeks, the short sections have done better and we believe they will continue to do so. We think the long periods will stay where they are. The debate is whether inflation will reaccelerate and, if that happens, the long stretches will suffer more. We favor maturities between 5 and 10 years.
And what about credit quality?
Here we see that the gap between the highest quality and lowest quality companies has widened. In the soft landing scenario, credit quality is on track.
What opportunities do you identify in the bond sector?
In this soft landing scenario, we still prefer the market high yieldwhich is doing well and there are still good coupons. We also like financial debt, like CoCos.
Emerging debt should also do well.
Yes, there are opportunities there too. What we have seen is that the market has become a little more selective and dependent on each local currency. Recently we have seen how the Mexican peso and the Brazilian real have weakened due to their own situation, while other currencies, such as Asian currencies, have strengthened.
Are central banks afraid of triggering a rebound in inflation if they cut rates too quickly?
Maybe, although there are differences. The Fed is convinced that inflation is falling, while in Europe it believes that reductions must be more gradual since service activity is not yet under control, as are wages, with economic growth already very weak.
There will be volatility until the US elections due to de-risking
Do you expect greater volatility leading up to the US elections?
There will certainly be some volatility, and investors will likely want to reduce some risks ahead of the election. The market recovered very quickly after shock August and there is likely to be a reduction in risk now.
Valuations on Wall Street are strongly conditioned by 7 Magnificent. Do you think they are too obese?
It’s true that there is a lot of excitement about these companies and their growth, but it’s unclear when and how this will come to fruition. We believe that AI is a reality and that it will have implications for productivity, especially for large companies which will significantly reduce their costs. This is why companies are investing so much today. There will still be years where its earnings are disappointing but in valuations, for example of NVIDIA, it is cheaper today than a year ago.
I don’t think there is a bubble in the microchip sector
So you don’t think there is a bubble in electronic chips…
No, I would say no. These are highly valued companies, with demanding multiples but supported by real earnings growth prospects.
With rates falling, is it time to focus on investing? value?
You have to be selective. I wouldn’t say you have to buy everything. value or the opposite but there are interesting areas. For example, European financial companies continue to benefit from high rates and trade at low prices. Same with the small capitalswhere there are some interesting things and some names are really very cheap due to the punishment of the last two years.
A sector to avoid?
Consumption is complicated due to the lack of growth and persistent inflation, with valuations that are not low. This is a sector at risk if consumption falls.
What is behind the power of gold?
We favor investment in gold, which remains bullish because it essentially plays a fundamental role in the diversification of the dollar. Plus, with this geopolitical situation, it has an added attraction. Many emerging countries want to become more independent from the United States and the dollar. Over the past two years, central banks have been buying gold to build their reserves and this is the most important factor. Additionally, due to the expectation of lower interest rates, the dollar weakens and the price of gold rebounds.
Finally, what recommendation would you make to a new investor?
The most important thing is to be disciplined in terms of investing. It is better to invest gradually rather than doing everything at once. No one can always predict what will happen in the market, even professionals do not give any guarantees. The next thing I would tell you is to diversify. Not necessarily much. You don’t have to make 100 different investments, but don’t put everything into one asset, whatever it may be.
