The American manager Capital Group presented this Thursday its investment strategy and its outlook for the months to come. With a a clear long-term directionhis current vision involves a normalization of inflation and interest rates that allows a return to a more normative capital allocation.
The remuneration that cash and short debt tranches have received in recent months will no longer provide a hedge against inflation and, therefore, the thesis of investment requires diversification clearly between debts with longer maturities, those of companies rather than public ones, but with always a preference for investment quality securities, whose risk-return equation remains slightly better than that of high yield.
The environment macro What the leader paints for the two major Western economies is that of a determined normalization of interest rates on the part of central banks, which have already warned of certain signs of weakness in the economy, notably in terms of employment and manufacturing activity. “Central banks do not want to kill the economy for the sole purpose of reducing inflation below 2%,” explained Robert Lind, the group’s economist.
“We think that over the next decade, structural interest rates will be higher than what we’ve seen over the last decade. Probably The neutral rate in the United States will be between 1.5 and 2.5% in real terms [descontando la inflación] while in the eurozone, we think it will be more like zero real [es decir, donde esté la inflación en cada momento].
The director explained that currently the stock market risk premium compared to investment in bonds has been significantly reduced and even in the United States it is at its lowest level in 20 years. In Europe too, this premium has been reduced to the lowest levels in a decade.
Fixed income strategy
Demir Bettini and Flavio Carpenzano, representing a fixed income team that has reached fourth place globally in terms of size of assets managed, highlighted a clear winner in the current macroeconomic environment, which is bonds, revaluing thanks to falling rates of interest. controlled inflation and a soft landing of the economy. “It’s the perfect ecosystem for fixed incomewhich continues with attractive valuations,” Carpenzano underlined.
After the terrifying year that this asset class suffered in 2022, it now once again plays a role of protection against inflation and diversification of portfolios. “Current yields continue to be above their averages over the past decade and suggest positive returns over the next five years, based on what the market is currently pricing in,” they point out.
Above other classes, they favor investment grade companyas they predict it will perform better in the coming years and will not cause volatility fears. Within it, the debt of the banking sector and that of the pharmaceutical sector, which is more defensive, stand out.
Opportunity in certain emerging countries
Capital Group has offices, analysts and managers located around the world, which is why it has a particular approach to emerging markets and boasts of having launched the first fund in history dedicated to these countriesin 1986.
Fixed income manager Kristie Spence points out that historically when yields the averages of emerging countries have exceeded 6.7%, as is the case currently, returns have always been very positive in the next 2 years, from 6.5% to 11.4%.
Spence points out as an argument in favor of the fact that emerging currencies now seem undervalued against the dollar and point to certain frontier markets as big opportunities within these debt assets, such as Egypt, Nigeria and Turkey, “which are rated as if they are less safe than they are are”. They currently offer returns in excess of 25%.
Regarding emerging equities, Chris Thomsen, emerging markets manager, also highlights below average grades of the last decade in many countries such as China, Brazil or Mexico, among others.
Thomsen highlights several tailwinds in this regard. “The demographics of these countries are favorable since each year they are those which add the most population to the middle classes capable of consuming.” From there, he indicates, sectors like the telecommunications, digital banking, semiconductors and commerce online. Regarding China, they conclude that it is the main producer and consumer of robots and that with this automation it will have a competitive advantage over the rest of the world.
Beyond the “Magnificent Seven”
Finally, the equity strategy, even if it goes well beyond the Magnificent Seven, the trends which will now guide the market have had a lot to do with it since the acceleration of technological development This is one of the keys. “Economic growth and interest rates will diverge, inflation will be volatile. Despite this, regardless of what happens in the short term, in the long term it has been shown that there are many more years of “It’s just a matter of being on the stock market,” explains David Polak, investment director at Variable Income.
However, the main opportunities are now seen in two major megatrends, in addition to the technological one mentioned above, which are industrial renaissanceclosely linked to the deglobalization of production but also to the energy transition and the necessary investments in infrastructure; and finally, the healthcare innovation“with enormous potential in the development of new treatments,” adds Polak.
The director explained that currently the stock market risk premium compared to investment in bonds has been significantly reduced and even in the United States it is at its lowest level in 20 years. In Europe too, this premium has been reduced to the lowest levels in a decade.
“We think that over the next decade, structural interest rates will be higher than what we’ve seen over the last decade. Probably The neutral rate in the United States will be between 1.5 and 2.5% in real terms [descontando la inflación] while in the eurozone, we think it will be more like zero real [es decir, donde esté la inflación en cada momento].
The environment macro What the leader paints for the two major Western economies is that of a determined normalization of interest rates on the part of central banks, which have already warned of certain signs of weakness in the economy, notably in terms of employment and manufacturing activity. “Central banks do not want to kill the economy for the sole purpose of reducing inflation below 2%,” explained Robert Lind, the group’s economist.
