Higher interest rates make it more expensive to borrow and make companies’ future profits look less attractive. Many of the world’s central banks have been raising interest rates, but the move has been led by the most powerful among them, the US Federal Reserve (Fed). The Fed has been hiking interest rates in an effort to control too-high inflation: the economy has been overheating.
‘The problem the Fed has at the moment is that they have got yields up, but it is having no effect,’ said Mark Nash, Lead Investment Manager, Jupiter Strategic Absolute Return (SARB) strategy. ‘The recent inflation data out of the US is not good. The economy is too strong – so service prices have just boomed up. Clearly there is an issue with the US economy that the Fed cannot quite gets its hands on.’ Ned Naylor-Leyland, Lead Investment Manager, Jupiter Gold & Silver strategy, agrees the Fed has been acting aggressively of late. ‘It seems as if they are determined to get the baseball bat out and smash the china shop up,’ he said.
However, looking further into the future, Ned thinks the Fed could reverse the rate hikes eventually. ‘The market’s general expectation is that there will be a pivot, and that the Fed will be forced to support the economy, and maybe even some of the financial plumbing, in due course,’ he said, pointing to potential strains on the stability of the financial system.
Amadeo Alentorn, Lead Investment Manager, Jupiter Merian Global Equity Absolute Return (GEAR) strategy, said he did not take an either-or view on these complex macroeconomic issues. ‘We recognise that the geopolitical and macro environment will have a direct impact on the way that investors behave in markets,’ he said. ‘What we do is every day we take the temperature of the equity market: are investors feeling optimistic or pessimistic? What is the risk environment like? Are investors experiencing a lot of uncertainty – like this year – or are they very confident?’
Amadeo’s team makes statistical comparisons between the market temperature now and how it was in the past. ‘For example, this year our models correctly identified that at the beginning of the year investor behaviour was very similar to the bursting of the dot com bubble in the early 2000s,’ he said. ‘People may say, the dot com bubble was very different, and technology has greatly advanced since the early 2000s: that is true, and every cycle is a bit different; but crucially, the way investors behave in the face of fear or greed is very similar throughout the cycles.’
Correlation is the degree to which two variable investments move together: two investments with high correlation have tended to move together. For example, in the first nine months of 2022, equities and bonds have both fallen, and so they have had higher correlation than usual.
In Mark’s view, investors should consider diversifying outside traditional equity and traditional bond strategies. ‘It makes sense to diversify a bit across more strategies rather than across traditional asset classes,’ he said.
Amadeo Alentorn uses a market neutral approach to investing in equities.
‘We construct a long-short, market neutral portfolio,’ Amadeo said. ‘We look for stocks that are attractive, that are likely to be winners, and we go long those stocks. At the same time, to remove directionality from the portfolio, we short, by the same amount, stocks that we find unattractive. For example, if the market falls by 20%, then it might be that our long book falls by 18%, and our short book gains 22%, then the portfolio would have a net positive return of 4%,’ he said.
Mark Nash points to the importance of flexibility. ‘The ability to invest globally, to be flexible and to use derivatives to manage the cycle has never been more important,’ Mark said. ‘In the course of this year, if you had kept the same growth and inflation view, you would have experienced volatility in your returns – you would not have got it right the whole way. Both growth and inflation changed during the year, and you had to adjust as you go. Investors who can demonstrate that flexibility are worth some portion of your portfolio, in my view.’
With so much uncertainty around, Ned Naylor-Leyland emphasised the importance of having a hedge.
‘Gold is a monetary metal and a traditional hedge, widely used by central banks and institutions to protect against inflation and risk in markets,’ he said. ‘Unlike fiat currencies, monetary metals cannot be created out of thin air!’
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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