The ALFI Global Distribution Conference held in Luxembourg today explored the topic “the key macroeconomic challenges facing the investment management sector” in the inaugural session.
Anton Heese, global fixed income strategist & portfolio manager, Morgan Stanley, examined macroeconomic influences on various asset classes in this session at the Association of the Luxembourg Fund Industry (ALFI) conference.
As a ripple effect of Covid-19, labour markets have tightened due to reduced participation, leading to higher inflation and higher household income growth. According to Heese: “In the goldilocks scenario, the labour market eases and inflation comes down as the labour force expands.” The average inflation rate for the G7 economies shows the biggest inflation surge in 30 years driven by core goods prices surging, demand for housing increasing and measured inflation going higher, he cited.
The Russia-Ukine conflict also led to structurally higher commodity prices, especially in European energy prices, with German manufacturing particularly badly affected. Considering the Eurozone and German energy PPI ( index levels), costs are still roughly double pre-conflict levels. Heese highlighted that while the German manufacturing sector is in crisis, the broader economy is "doing okay", based on EU economic sentiments and German IFO expectation indices.
However, corporates adopted prudent balance sheet strategies, and the consumer has excess savings and strong income growth. Data shows tighter financing conditions have not led to more defaults, cited Heese.
“Housing inflation has been markedly in some economies, the UK, Australia and the US, for example. I think that could be a challenge for the Fed going forward,” said Heese. “The area where we see persistent infection - biggest concern of the central banks - is on services, driven by labour markets is strong wage growth combined with strong demand.”
He also pointed out how the Chinese economy is undergoing a shit from an export-oriented economy to one more dependent on domestic demand. Rapid urbanisation already seen in China and given the many other countries of China's size could lead to a similar kind of view of annihilation on goods manufacturing prices, but Heese suspects the trend of goods inflation has passed.
“We could be in a world going forward where it says inflation remains as sticky as it is, central banks will probably have to run tighter monetary policy is going to be more difficult, I think in the future for central banks to achieve 2% inflation targets consistently.”
More shifting dynamics could be expected, remarked Heese. Previously robust economies face challenges, while others, like Greece, now lead in manufacturing within the Eurozone.
Heese also addressed the dilemma around higher inflation, beating the diversification argument for "fixed income’s death".Cash has become an attractive asset, opined Heese. “Challenging fixed income on yield, it may remain so for a year or two. The 2022 selloff means fixed income expected returns are higher. It still has an important role to play in mixed-asset portfolios, reducing downward risk.
Heese also underscored that equity returns are primarily driven by earnings, and macro-based earnings models have struggled recently as many business cycle indicators have failed to correctly predict the cycle.
Finally, he cautioned that higher yields pose a threat to investors whose business model relies on using leverages to buy equity risks.
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