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Don’t chase markets into the ‘danger zone’: Ninety One
Markets understand that central banks have likely reached the peak in interest rates and are priced for that, with consensus expectations for a soft or no landing. But there’s a high probability that the impact of tightening has not yet hit home, according to Ninety One.
And while the US economy is structurally in a good position, the potential for more economic bumps in the road means markets are in “the danger zone”.
“There’ll be a reasonable amount of market volatility and this will I think present opportunities to build exposure to assets we want to own over the medium term,” Philip Saunders, director of the Ninety One Investment Institute, told media last week. “Chasing a momentum market we have to be careful about at the moment, but positioning for the up cycle, which should start to become apparent in the second half of the year makes sense to us.”
“Equity markets have been very narrow and if we’re right and we’re seeing a building recovery then you would expect equity markets to broaden, but at the moment it’s unbalanced; we haven’t yet seen confirmation from broader markets but there have been encouraging signs.”
Meanwhile, the reset in the cost of capital is positive over the medium- to long-term as it discourages capital misallocation and extreme financialisation, but in the short-term investors will have to figure out how low interest rates will go.
“We’re long duration, and have been since the third quarter when the market disruption represented an extraordinary opportunity to add duration,” Saunders said. “Clearly we’ve seen a substantial rally and are in a corrective phase at the moment, but for the time being it’s right to have balancing exposure in duration as an offset in case we have a bumpier ride as tightening continues to impact economic activity.”
In Western markets credit spreads are pretty tight and Ninety One has grown “cautious on that front”, taking profit and looking more closely at sovereign debt. But there are opportunities across emerging markets where central banks have “gotten policy right”. The behaviour of gold last year was “very interesting”, Saunders said, because it shouldn’t have done well in a higher real interest rate environment with a strong dollar.
“But gold held up remarkably well and I think that’s an encouraging signal,” Saunders said. “Gold is regaining its reserve asset status, which is lending support to the metal and we think it remains in a structural bull market. But it’s been a bit too exuberant recently and we think there’ll be better opportunities to allocate.”
