The global economy has resisted better than expected, although the question is whether a recession has truly been avoided or delayed. In retrospect, the effects of a more restrictive monetary policy were neutralized by excess savings, the rigidity of labor markets, the relative insensitivity of consumers and companies to rising interest rates and the emergence of generative AI . . However, these positive factors have now been fully priced into stock valuations and, looking ahead, uncertainty over rising interest rates persists and puts pressure on the economy. At least, that is what some economists in the United States consider.
Bullishness about the potential of AI has spurred gains in a relatively limited group of large-cap stocks, particularly in the United States. In terms of confidence, the recent rally, driven by more bullish institutional positioning, is likely to have been excessive. Companies like Nvidia have risen more than 217% on the stock market, or Microsoft by 40%. “It is true that AI has the potential to boost the economy and markets, but the process is most likely to take several years and be complex, allowing for productivity improvements but also various forms of disruption,” according to Wellington Management.
“What’s more, it is difficult, if not impossible, to correctly establish the earnings forecast and the valuation multiple in the face of important technological revolutions. Although we are not going to rush upwards in the technology sector, in the short term we will seek a balance in exposure to the Value segment versus Growth,” adds the manager in this regard. The earnings trend has been uneven across regions, but globally it has been in positive territory. “In our view, there is reason for some optimism, although our baseline assumption is that macroeconomic deterioration will weigh on earnings expectations,” says Wellington Management.
The focus of fixed income
Central banks continue their effective contribution to the economic slowdown, so we maintain our slightly bullish view on defensive fixed income. In the second quarter, the market raised its forecast for interest rates as the Federal Reserve and other central banks reiterated their commitment to combat high and persistent inflation, despite evidence of its decline. A ‘pause’, which used to mean that the next step would be a rate cut, is now more of a ‘leap’, with central banks waiting to see the cumulative impact of tighter monetary policy before resuming hikes. . . The Bank of Canada and the Reserve Bank of Australia have already implemented this strategy.
The market revaluation increases the attractiveness of US public debt compared to European and Japanese debt. The Federal Reserve’s tightening of monetary policy should benefit longer-term maturities in the United States, which, in turn, continue to see strong demand from insurance companies and pension funds. The process of tightening monetary policy in Europe is still incipient and inflation is higher than in the United States. In Japan, experts say that any adjustment in monetary policy should be gradual.
Furthermore, the world is in the final phase of the credit cycle, characterized by an inverted yield curve, tighter credit conditions and deteriorating fundamentals. Historically, these factors have been clear indicators of negative excess returns relative to government debt over the next 6 to 12 months. So far this year, bankruptcies in the United States have exceeded the level of any comparable period since 2010. “High-yield spreads should be at least 140 basis points higher than the current spread of +430 basis points, given the risks described above,” Atlantic Capital analyzes in a report.
“In this environment, we expect investment grade credit to outperform high yield, even though high yield spreads narrowed during the second quarter, while investment grade spreads remained virtually unchanged. changes,” adds the entity. In light of this and the strong starting level of investment grade fundamentals, Wellington Management has raised its positioning against global investment grade credit to neutral. “We are more inclined towards emerging market debt in hard currencies than high-yield corporate bonds, since the former entail more risk,” says the manager.
