Prudent Steps Forward

Caution remains. Since our previous blog few months ago, equity indices across the globe have reached new highs. Yet, we feel that investment managers (“IM”) remain similarly worried about the economic, market prospects and, lean towards conservative investment approaches. As usual, the actual article behind each IM’s view is available by clicking on their respective names.

Eyes on Rate Cut
As highlighted by Invesco, it was somewhat of a historic week for monetary policy at the end of March. Bank of Japan hiked rates for the first in 17 years and, announced the cessation of ETF and REIT purchases. The Swiss National Bank took a surprising step by cutting rates, possibly initiating a trend among developed central banks to reduce rates in 2024. On the other hand, the Fed and Bank of England maintained their rates unchanged reflecting lingering worries over persistent inflation. Yet, despite the above expectations inflation readings in January and February, the Fed’s dot plot chart still shows three rate cuts in 2024. Fidelity International interprets it as the Fed being willing to accommodate higher inflation in the long term. Meanwhile, Franklin Templeton observes that the three cuts projection in March was a close call. Indeed, looking at closer at the dot plot, nine out of nineteen Fed governors saw two cuts or fewer versus the remaining who envisioned three or more cuts. Just one governor could have swung the median to only two rate cuts in 2024, and the narrative would have changed. With multiple indicators pointing to a slowdown in the US economy, the market consensus is fixated on 3 cuts this year and looking at June for the first cut. Aegon Asset Management is worried that, if the inflation readings before June (three consumer price index reports and two personal consumption expenditures reports) do not provide evidence of abating inflation, the market will reprice. 

Trump win likely to refuel inflation pressure
Looking beyond June, the outcome of the US election will have implications for US inflation as well. Policy orientations of the candidates are different. Wellington Management outlines several areas including federal deficit management, tax and spending shifts, regulatory policy changes, immigration reforms, trade initiatives, and geopolitical maneuvers that will impact the US economy and inflation. For instance, Trump's stance on fiscal, trade and immigration policies are likely to heighten inflationary pressures through higher government spendings, increased import costs and, reduced labor supply. While under Biden, Allianz SE hints that a moderate and targeted approach to tariffs and fiscal policy could mitigate some of the inflationary risks, therefore the economic outlook could be more stable. However, given the low consumer confidence and how the indicator has gradually been politically tainted in recent years, AXA Investment Managers suggests that the best strategy for Biden to win the election is to emphasize on his non-Trump positioning rather than touting his economic achievements. As reminded by American Century, U.S consumer are running out of steam, many have depleted any excess savings accumulated during the pandemic. Today’s personal savings rate stands at pre-COVID levels. Unemployment rose to 3.9% in Feb (up from 3.7% in Jan).  Consumer expectations are near past year lows.

Still Hesitant about China
Despite signs of improving markets, investment managers still show structural concerns towards China. Allianz GI points to the recent positive performance of China A-shares, bolstered by government support and improved domestic investor sentiment. It sees CSRC’s emphasis on enhancing shareholder returns and the President Xi’s focus on “new productive forces” as potential areas for positive returns. However, the macroeconomic environment remains lukewarm, tempering the manager’s optimism with caution. T. Rowe Price emphasizes China's economic rebalancing towards high-quality, innovation-driven growth is set against a backdrop of mild fiscal policies and ongoing deleveraging. They suggest that the transition will take time and prefer to focus on infrastructure sector in the shorter-term, namely rail and power grid equipment. SSGA draws parallels between China's current structural headwinds and those faced by Japan in the past, underlining the need for both immediate and long-term policy responses. These include addressing demographic challenges, reducing the burden of non-performing assets on banks, and implementing property sector reforms. For them, such comprehensive reforms are critical for mitigating risks of stagnation and capitalizing on long-term growth prospects. Wellington Management has similar concerns and recommends a tactical underweight position in Chinese equities. They observe that the market has taken a “wait-and-see” stance, notably because of the lack of clarity on how the headwinds will be tackled. In their view, other Emerging Markets offer higher risk/return now.

Early view on 2Q Equity Outlook
While only few managers have published their 2Q Equity outlook, the consensus is largely neutral. BlackRock stands out by being positive on the U.S. equities, particularly AI, and increases its overweight on Japanese equities, citing supportive local market policies and solid corporate earnings. Other managers such as J.P. Morgan Asset Management, Nuveen, Russell Investments, American Century and Franklin Templeton all have a more neutral stance towards developed markets equities. J.P. Morgan Asset Management warrants caution against AI winners of 2023 and prefer industries such as health care and semiconductors. They are wary of near-term challenges in data governance (security, privacy, ethics) affecting company performances and frustrating investors. Nuveen thinks that stretched valuations globally and their more hawkish view on rates compared to the market warrant a conservative position on equities. We note that any managers reflect their cautious stance on equities by advising their clients to allocate towards Quality companies. 

Focus on Quality equities
In line with their market cycle expectations, Wellington Management and Morgan Stanly Investment Management have described their investment process when selecting quality companies. We thought that it could be interesting for our readers to take note of those processes and assess whether their company could be positioned in such bucket. 
Wellington Management uses a multifaceted approach involving a quantitative framework and ESG analysis to evaluate companies on value, dividends, and resilience. They prioritize companies trading at a discount due to their inherent complexity or equity story controversies, viewing these as potential opportunities. They typically focus on large multi-line enterprises and cyclical industries. Then, they look for sustainable dividends, which are viewed as a potential source of downside protection and compound returns. It reiterates that management’s commitment and ability in paying dividends in good and bad times while balancing investment for growth is critical. Finally, they assess the resilience of the company, including criteria such as scale, moat, balance sheets strength, expertise in value creation, and management culture.
Meanwhile, Morgan Stanley Investment Management emphasizes the importance of high returns on operating capital, through high pricing power, high and stable gross margins, capacity to invest in talent, R&D, and marketing, and limited leverage. They exclude certain sectors deemed incompatible with their high-quality criteria and choose management teams they can engage to align long-term goals.

We hope this article gave you an informed view of the latest investment intentions of major institutional investors and will be constructive for IR strategy assessment. Irostors is the first SaaS platform that helps IROs, and CFOs simplify investor targeting through IR data. Feel free to contact us to discuss our solutions.