Talk us through the CNI numbers. Jackson Hole.
The summer you know I was thinking about this rally was a bit abnormal and
Ulysses and Jackson Hole and now the China slowdown does that kind of paint
that picture that maybe summer is over now.
Yeah the summer rally absolutely has come to an end.
I think it's more likely we revert to the underlying macro and market
conditions that characterized the first half of this year.
The reverberations from Jackson Hole will continue for some time.
We are seeing it frankly in renminbi. We're seeing it reflected in weaken
demand in the United States but in particular the EU as well.
And for as long as we get this sense that the Fed is so fixated with a laser
focus on bringing inflation down to that target area to 3 percent.
My sense is the markets will remain on the back foot.
So what does this really mean. I mean are we heading towards perhaps
setting the groundwork for a policy era. I mean is that on your radar.
It's certainly a risk and it's one that needs to be taken very seriously.
The Fed have the pre-eminent risk in their mind of allowing inflation to
remain unchecked. So right now we have echoes of the
Volcker moment in the late 70s early 80s where inflation was grasped and tackled
aggressively. Fed Chairman Powell seems to be
channeling his inner Volcker right now and seeking to communicate to the market
his determination and aggression in driving down inflation.
And of course that's why markets have so aggressively priced
resold repriced as a disabuse themselves of this concept of the pivot.
That is a fantasy. Right now inflation is the most single
most important policy target for the Fed.
And frankly there will be fallout both at the economic level and in markets as
well. But then you look at energy prices in
the UK and Europe here as well. You're having a look at those things.
These are huge increases. And then you've got governments.
Would you believe in giving money back to the people in order for them to build
to pay their bills at the same time the ECB tightening.
I mean that in itself. Energy prices are going up by the
magnitude that they are is an interest rate hike and quite a sizable one.
It's absolutely a form of monetary tightening.
And let's not forget quantitative tightening as well in the United States
that similarly will reverberate around the global economy.
The price hikes are more of a supply shock
derived. And I don't see that changing anytime
soon. So yes we have got I think ourselves a
challenging three to six month period. And by the way one of the key reasons
why we are at Credit Suisse elected to revise lower our equity recommendation
from neutral to underweight. Earlier this week reflecting I think
heightened risks in the next six months and a preference for a more I think
prudent allocation of risk. So you guys talked about ongoing
underweight global equities where you put your money down.
Well we're still focused on opportunities in the private sphere in
particular but more broadly alternatives which is an area that we're particularly
focused on. It provides some protection from the
volatilities of public securities and it's something that our clients welcome.
But we also see selective and discreet opportunities in the fixed income space.
For example the yields now on hard currency emerging market bonds are
looking a little more attractive. And still we're looking at selected
opportunities particularly for our so-called super trend themes which are
these multi decade old investment strategies which provide exposure to
what we believe are some of the most important thematics driving the global
economy right now. It's obvious that's going to be also
predicated on what you think why the dollar is going.
Yeah well look. Right I'm going to hedge against that.
And how do you do that. Indeed.
Right now look the only way I think for the dollar is likely higher given right
now it seems the Fed is the only major game in town.
It's quite possible that the ECB will surprise us to the upside in the next
few days and hike substantially more than maybe the market's anticipating.
And certainly inflation metrics out of Europe in general.
Germany in particular suggests that's important.
But I think upward pressure on the dollar is likely
to remain a feature for some time. And of course clearly we're feeling the
effects of that in the Asian currency complex right now.
And I have to wonder if we're looking at any kind of catalyst for it for you to
get back into equities. What would it be is that we need to see
inflation come down to maybe 5 percent and maybe the federally more inclined to
pivot and cut rates. Next year what is it that you need.
Well I think certainly some investors will be very focused on valuations.
My sense is valuations in the United States were to get down to sort of two
possibly more standard deviations below a long term 10 15 year mean it might
attract value hunters. But our overall context and focus is
seeing inflation at or very close to the Fed's 2 percent or 3 percent target.
And not only touching that but actually remaining there for a reasonable number
of months. And at that point I think we can
actually anticipate a pivot. And then I think of course it will be an
equity story once again. I don't think we're going to get there
for the next three or six months. Well even further do you think it could
be a year before we get we're going to have to go from 8 percent to 2 percent
and stay there. So that means you stay out of public
markets generally speaking for more than six months.
Well we remain underweight and how long it'll take.
It would depend on whether inflation is transitory.
It appears not to be. And the more sticky it gets particularly
on the services side and I'm talking obviously about wage pressure I'm
talking about housing costs then I think it becomes a slightly more enduring
problem. Our sense is that you know come the
second half of next year we will be approaching that target.
We've already passed peak inflation. Let's be clear inflation has already
peaked. It's already trending lower.
But I don't think it's going to be a straightforward transition.
I think it's actually going to take quite some time.
And the inflationary implications of that suggests that again a second sorry
a second quarter event is probably the more likely target.
It strikes me that we do look at inflation as a unitary but the structure
of inflation is changing. We've got globalization on top of that
degree inflation and then demographic challenges as well.
So it becomes a harder nut to crack. Yeah there's likely to be something of
an enduring premium that we that we have to
live with postcodes it. I think that's highly likely.
Right now I think the Fed are fully focused on the risk of inflation as
being the public enemy number one. They are looking to drive that down.
That was the message from Jackson Hole. And if there is something of a 50 basis
point maybe 100 basis point premium to inflation after that it's going to be
tomorrow's problem. Right now the focus is getting inflation
down to target. So what do returns look to you say over
the next five years if there is if we're suddenly back to normal inflation and we
have to bake in that premium again that we haven't baked in really for 15 years.
I think there is going to be a period of dislocation David.
I genuinely think that looking forward over the next one to
three years is going to be something of a volatile period.
We've had low rates now for what 15 years.
We've had house prices shooting higher. We've had asset prices both bonds and
equities substantially higher than those pre even GFC levels.
So my sense is we're going to need to see some sort of rebalancing and
probably a disruption of some of the pricing that we've got that we've been
undrawn accustomed to. So again the importance of an actively
managed diversified portfolio one in which we have a reasonable exposure to
the major asset classes is I think that the likely strategy which will
outperform over that. How does China fit into that strategy
for you now. Well China clearly is of critical
importance to investors that have a home base that have a particular preference
for and focus on North Asia right now. China obviously is grappling with
a slowdown of some generational importance and trying to engineer a way
out of that. As we hearing it is quite challenging.
I think hopefully we can get to see some clarity after the People's Congress
particularly relating to 0 Covid. And I think once that happens we will
maybe unblock some of the logjam that has prevented and made more hesitant the
investment in infrastructure and the use of that stimulus for spending which will
I think provide something of a growth fillip.
But right now the China story is really contingent on policy support.
If you're an investor and right now there's that hesitancy in policy support
which is I think holding the equity story back.
Europe equities.
Europe is a big challenge right now. I think there's absolutely almost a
certainty of recession in Europe. Inflation is proving to be substantially
harder to manage. I think that the ECB really do have to
step up and surprise markets to the upside maybe a 75 basis point hike in
their next meeting. Quite possibly we have this enduring
recession from the supply shock due to energy prices.
Right now it's a very challenging story for investors and for that reason we
remain underweight.