The path to net zero real interest rates
Talib Sheikh, Head of Strategy, Multi-Asset discusses the efforts of central banks to ‘out-hawk’ each other, and what the investment implications are for a rate hiking cycle with zero real interest rates as its destination.
Central banks have pivoted their policy agenda quite dramatically, almost seeming to try to ‘out-hawk’ each other, while US payroll data came in better than expected last week leading to a rapid re-pricing at the front end of the US yield curve. People are even now debating whether the Federal Reserve could raise rates by as much as 50bps in March – our view is that a move of that magnitude is unlikely, but there’s no doubt we are in a genuine hiking environment now, with five and a half rate rises priced into the market currently.
One of the big questions, though, is whether this represents the end of the cycle. At present the market seems to anticipate that interest rates will rise to the point that real rates reach zero, at which point inflation will be tailing off. That’s one of the reasons why there has been weakness in equity markets, with even more savage rotations beneath the surface as the market’s factor and sector preferences have flipped on their heads. The chief casualty of this so far has been the non-profitable part of the US tech sector.
For us as Multi-Asset investors, our view remains that this is a time to favour shorter duration value assets and European/UK equities, and while further volatility should be expected this year we haven’t turned anything like bearish enough to dump risk assets.
An interesting potential opportunity is whether Chinese equities represent attractive value, given how tough a year that asset class experienced in 2021. Certainly China is not without its challenges, such as its commitment to a ‘zero Covid’ policy, but we do like the dynamics of a PBOC that is loosening policy at a time when the Western central banks are tightening. So that’s an area where our view has become increasingly more favourable in recent months.
Sure-footed Indian market on firm ground to ride out volatility
Avinash Vazirani, Fund Manager, Global Emerging Markets, examines the impact rising interest rates may have on India’s economy and explains why the outlook for equities remains positive despite foreign investors fleeing the market.
The interest rate environment in India is completely different to Europe. In India, rates have already been high, meaning investors have been able to generate a decent yield by investing in government bonds, as opposed to in Europe where investors have been used to negative returns. For example, the 10-year Indian government bond yield has risen from lows of 5.3% to 6.9% over the last few months. Further interest rate rises are probable.
While some may see this as a potential headwind for the Indian market, we believe that the outlook is positive. The corporate environment is encouraging – company balance sheets are strong and debt levels are low. As a result, we believe that the Indian economy is well-placed to deal with any volatility caused by the upcoming interest rate rises.
When looking at Indian companies to invest in, we favour well-run companies where the share price valuation isn’t unduly high and where we see the company as having high growth potential. Recently, there has been a shift in the market’s sentiment in away from highly valued growth stocks to those which are more attractively valued. This rotation has broadly followed the wider trend we have seen in global markets, away from speculative tech stocks into more dependable, and profitable, growth stocks. One area of the market that has performed particularly well recently is financials, particularly state-owned banks, which have benefitted from improved economic conditions.
Looking ahead, the outlook for Indian equities remains positive despite large outflows from foreign investors. Since October 2021, $11 billion has been pulled out of the Indian stock market. This is largely due to hedge funds taking profits off the back of last year’s strong performance. However, these outflows have been partially offset by inflows from domestic retail investors. For example, there have been $5 billion of net inflows per month into equity funds over the last few months, with over $1.5 billion coming from long-term savings plans. This represents a strong (and growing) part of India’s market and means that the financial markets in India are more resilient and less reliant on foreign investors than in the past.
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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