Fixed income is the alternative to the excess volatility expected in equities due to uncertainties in the economic and geopolitical environments. This is one of the conclusions of the Dialogues at La Vanguardia held a few days ago to analyze the best investment strategies at the current time. Participating in this day were Pilar García-Germán, Sales Associate Director of Fidelity; Ricardo Comín Executive Director
“Our conviction in AndBank is very high in fixed income assets,” stated Juan Luis García Alejo. “Positive real interest rates now offer adequate returns. “This hasn’t happened in years,” he added. His preference is for debt issues by high-quality companies, in euros and with close maturities, although longer durations will have a place in the near future.
Ricardo Comín stated that fixed income is what will work best next year. “We are returning – he says – to the scenario of financial normality that existed prior to the crisis that began in 2007-2008. The era of zero or negative interest rates is over.”
Pilar Pilar García-German said that at Fidelity they are very cautious regarding the evolution of the market, which entails the need for very active management. She confirmed that fixed income is certainly the alternative to excess volatility. As attractive assets, opt for Treasury bonds, bank credit and quality companies.
Pilar García-Germán added that, despite the existing uncertainties, you must always have variable income. “We – she said – have a global strategy, we look at the whole world, but we maintain a defensive position, based on the dividend that the companies have, their quality and good management.”
Fixed income, in the opinion of the AndBank manager, once again has the relevance it had in investment portfolios fifteen years ago. The traditional 60% variable income, 40% fixed income portfolio once again reflects an optimal investment point. Regarding equities, he believes that corporate profits will suffer as a result of cyclical risk. In this scenario, bet on large companies that have a bias towards value and that are more defensive than cyclical. Ricardo Comín, for his part, stated that Vontobel pays special attention to large companies in the American market that are capable of generating profits on their own.
The participants in the Dialogues in La Vanguardia agreed that there is an environment of great uncertainty and that the market is beginning to discount a certain recession, in view of the evolution of manufacturing production, the labor market and the greater family debt through credit cards that could lead to a decline in consumption.
For Juan Luis García Alejo, the thermometer of the current geopolitical situation in the Middle East can be approximated by the behavior of the oil price, which in turn impacts the control of inflation. For Pilar García-Germán, the key country, in this regard, is Iran, since it is a major oil producer and if it turns off the tap on its wells, a spike in crude oil prices would be inevitable. The blockade of the Strait of Hormuz, through which all oil tankers in the Middle East navigate, would cause – if it occurred – an energy shock with enormous consequences. The worst scenario would be for the United States to become involved globally in the conflict.
Despite all this, however, the market has opted, in view of its behavior, for the idea of de-escalation of the conflict or for a limited impact of it. “Uncertainty remains,” said Juan Luis García Alejo, “but the market gives a greater probability to non-escalation. In any case, it is prudent to be alert to react if the market shows signs of greater tension.”
“All scenarios – pointed out Ricardo Comín – are unpredictable. If we make an analogy with Ukraine we see that the apocalyptic forecasts that were made were not fulfilled. “Oil and natural gas did not rise as much as had been predicted.”
He added that, currently, in anticipation of problems with oil, the United States has begun negotiating with Venezuela. All this could put pressure on Saudi Arabia to open the tap on its wells if necessary, and could also activate the production of American bituminous oil exploitations. All this could avoid an energy shock. “But, in any case, at Vontobel we move away from companies that depend on factors that they do not control.”
Pilar Garcia-Germán agrees that the war really opens a new stage of uncertainty. “A month ago we expected that inflation had peaked and, now, no one can guarantee it.” She pointed out that in the world there are three actors that are inflationary, such as the increase in demographics, the deglobalization process that has begun, and the transition towards decarbonization. These factors, or the three Ds, will make it difficult to achieve the inflation target that central banks have set. “Perhaps,” she stated, “we should rethink the objective.”
Juan Luis García Alejo sees it as difficult for central banks to now address the discussion of changing their 2% inflation target because this would mean a new loss of credibility, after having made a mistake when they indicated that the rise in inflation was going to be temporary. “Now everything indicates – he stated – that it will decline more slowly than expected. Perhaps it will be possible to reach around 2% in 2025. This delay in controlling inflation supports the idea that there will be high interest rates for longer, which will affect the attractiveness of equities.”
Vontobel also agrees that there will be a longer stabilization of interest rates than previously thought. In this sense, according to Ricardo Comín, it is no longer expected that rates will fall in 2024. “It seemed – he says – that the central banks had controlled inflation, but, in view of the behavior of the underlying rate, they have not achieved it yet. Therefore, we believe that there will be high rates for longer.”
The positive part of this situation, in his opinion, is that the great mountains of debt of the States have always been paid with inflation and that will also happen now. Inflation increases nominal GDP and, with this, the proportion of public debt with respect to it is reduced.
The economic outlook, according to Fidelity, points to only 0.8% growth in 2023 in the European Union, with the risk of it beginning to enter a recession before the end of the year. The United States shows greater resistance, but consumption is beginning to show signs of weakness and could enter a recession in mid-2024.” This means – stated Pilar García-Germán – that we are very cautious about the markets of developed countries and we pay more attention, for example, to China, India or Indonesia.”
Juan Luis García Alejo warns that China has very serious structural problems, among them the crisis in the real estate sector, which directly and indirectly affects up to 40% of its GDP. The fact that China has a highly intervened economy, however, offers its government a very high margin of maneuver to avoid a crisis.
Both Fidelity and Vontobel highlight that, despite the current problems, China is the country that will grow the most in 2024 and one of those with the most positive valuations and good investment opportunities, since the Chinese stock market has not yet reacted to improving economic prospects.
China is capable of moving forward, said Pilar García-Germán, although it is not yet known when. Its domestic economy is beginning to boost internal consumption and overcome its problems of confidence in the future of the country. As consumption increases, investment prospects will improve.
With respect to India, Ricardo Comín pointed out that it is socially far behind China but that, on the other hand, it has great development prospects, although at this moment its companies are expensive in terms of valuation. With respect to Europe and the United States, the great risk, in his opinion, is that the central banks overdo the brakes with the cooling of the economy to reduce inflation. The increase in financial costs, which is now approaching 6%, labor costs and raw materials costs are increasingly affecting companies. “The logical thing,” said Juan Luis García Alejo, “is that profit margins go down.”
The director of AndBank, finally, pointed out that the new investment regulations prepared by the European Commission will make the advice – which is always necessary – more relevant to investors and savers. The regulatory change that the Retail Investment Strategy will entail will establish, in this sense, new
