The darkest time is just before sunrise. With these poetic words, the CEO of andbank Wealth Management, Juan Luis García Alejo, warns about the convenience of being alert to the upward reaction of the markets that will surely come sooner or later. “That's how he has been – he affirms – in all the crises, both small and large, of the last 55 years.
It is not known when the turning point will be this time. It usually occurs in about three months from the inflection point: the moment in which the worst case scenario is discounted”.
It is considered that much of the bad news has already been discounted in price. Equities have fallen by 20% since the war in Ukraine began and the dollar has appreciated by 15% against the euro. The andbank manager reminds us that the financial markets are always ahead, both against
a positive as well as a negative scenario, and that they always react in advance of the cycle. Despite these reflections, however, he recommends being careful in the short term and constructive in longer terms. In any case, he points out that when stress is at its highest in the markets, a more optimistic long-term position is often appropriate.
Juan Luis García Alejo has been one of the three experts summoned for dialogues in La Vanguardia to analyze the situation of the markets in the face of the current complex panorama, together with Patricia de Arriaga, deputy general manager of Pictet Asset Management Iberia, and Inés del Molino, director of accounts at Schroders.
Patricia de Arriaga agrees with Juan Luis García Alejo that much of the bad news is already discounted. he acknowledges, however, that the economic scenario of inflation, war in ukraine and geopolitical tensions is complicated. “The fear of investors and savers – she adds – is well founded. Keep in mind that the 50%-50% portfolio has had the worst performance in a semester in 95 years. now, however, the return to the construction of three or five-year portfolios offers good prospects. You have to be patient and watchful”. She also highlights the important role that fixed income is recovering after the poor evolution it has had in that long period of zero interest rates and high monetary liquidity.
Inés del Molino admits that it is very difficult to manage the emotions of fear at times like the present, with a war at the gates of Europe and runaway inflation. “Precisely for this reason – she affirms – now more than ever the first decision must be to seek expert and solvent financial advice for
help investors and savers calmly deal with any concerns they may have. At this time I would recommend looking at the long term and being patient. Because everything will get better."
“There has been a radical change of rules on the playing field, with inflation, rising interest rates and war. It is normal for there to be people who want to sell, but fear is the worst enemy of investors –adds Juan Luis García alejo–. The bad returns are already behind us. For this reason, precisely now is a good starting point to obtain profits over three or five years in risky assets”.
In the short term, on the other hand, the scenario is adverse for risk investment, according to the deputy general manager of Pictet asset Management Iberia. As a defensive investment, she points out that US government bonds are interesting, with higher interest rates and a tendency for the dollar to appreciate, but warns that there is currency risk. In either case consider the safe haven status of that debt. “You have to keep in mind – she says – that the Federal Reserve has made clear its intention to return inflation to the 2% target and that, for now, the market seems to give it credibility. This must be reflected in an interesting revaluation”.
Another alternative that he proposes for these times of uncertainty are credits with a high quality rating from companies that need financing. It recommends opting for short-term loans, that is, with short-term maturity and less sensitivity to interest rate variations.
“But -he warns- that in a scenario of increased costs and higher financing, the profit expectations of many companies are affected. In any case, the increase in the volatility of the yield to maturity of the sovereign debt tends to increase the spreads of high yield credit, since it has a worse credit rating and lower quality.
Another defensive alternative is investments in money markets, that is, in liquidity, which make it easier to be patient, but pending to invest again in higher risk
Similar recommendations are made by the director of accounts at Schroders, who points out that the euro zone is where there are better opportunities for high-quality corporate income. from andbank, Juan Luis García Alejo points out that with high bonds
quality in Europe, returns of up to 4% can be achieved and they are a good option. In equities, he insists on maintaining caution in the short term and putting the long lights in the medium and long term.
Inés del Molino, in equities, proposes betting on all that are alternatives to fossil energies, such as solar, wind or hydraulic energy. “In this area – she affirms – there will be a lack of investment. It is therefore a source of opportunities in the short, medium and long term”.
From Pictet, likewise, in equities, health stands out as a defensive sector. In geographical terms, this company bets on the United Kingdom and Japan. The British is a market that has fallen a lot and that has defensive sectors – health – and exposure to raw materials.
For its part, Japan – Patricia de Arriaga also explains – has been fighting deflation for much longer than Europe and the United States, and is already beginning to experience inflation. “The yen,” she says, “is undervalued and Japanese stock valuations are attractive. It has sectors dependent on China, which is affected, with a crisis in its real estate sector, but it can work in the coming years. Japan is the only major economy forecasting higher GDP growth in 2023.”
In an environment of inflation like the current one, in his opinion, there will also be capital that wants to materialize in real assets, infrastructure and real estate. This is a complementary investment to equities as a satellite of the portfolio, that is, the portion of capital destined to generate higher profitability, complementary to the most stable center of representative assets in the market.
In andbank, likewise, a growing demand for guaranteed funds is detected, although Juan Luis García Alejo believes that there are much more attractive alternatives in fixed income, adding a little more risk.
The prospects for the evolution of interest rates to combat inflation will determine, in any case, the behavior of the financial markets. Inés del Molino believes, in this regard, that the Federal Reserve could raise interest rates up to 4% and, as of 2023, could begin a return to reverse to start caring for growth, as soon as inflation shows signs of a certain gets better.
The central banks were perhaps wrong to implement excessively lax measures to avoid deflation, to the point that now it is necessary to retrace the path traveled. But they have learned –says Inés del Molino– to communicate their intentions very well and to be predictable. This is a fact that greatly reduces uncertainty and helps decision making.
“We have supply inflation and monetary policies affect demand above all –adds Patricia de Arriaga–. so the central banks risk their credibility and, therefore, they have to do what they must to control inflation, with a willingness to affect growth. But now the most important risk is that there could be a deeper recession than the one already suffered by the United States with high levels of inflation. That stagflation scenario is more likely as the Ukrainian war continues and the collapse in raw material supplies remains unresolved. What is worrying in this regard is that central banks are not used to dealing with stagflation. so a more lax range of inflation is foreseeable. We do not know when the tipping point will come. Central banks face an unprecedented situation. We have been in uncharted territory since 2008”.
“Let no one have the slightest doubt –concludes Juan Luis García Alejo– that the central banks are going to control inflation at any price, even if it is causing a recession to reduce demand and pressure prices down”.
