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- The company believes that the effects of the rate hike will be felt further down the road and that there will be a moderate recession in the coming months, caused by falling disposable income, the depletion of post-pandemic savings and an expected tightening of bank lending.
- Upcoming central bank meetings, commodities prices, China’s reopening and developments in the Russia-Ukraine conflict are the catalysts that will steer the markets in the months to come.
- In equities, the company chooses to seek refuge in defensive sectors and quality companies, preferring European over US securities, although it prioritises fixed income, opting to complete the portfolio with high credit quality assets with short maturities.
- Creand Wealth Management, the specialist private banking firm, predicts that interest rates will be higher for longer than the market expectations, at least until mid-2024. It also believes that the coming months will see the emergence of a technical recession, caused by declining disposable income due to sustained inflation over time, the depletion of post-pandemic savings and further tightening of bank lending.
- For Creand Wealth Management, upcoming central bank meetings, commodities prices, China’s reopening and developments in the Russia-Ukraine conflict will serve as the catalysts that will steer the markets in the months to come.
- The management firm explains that the macroeconomic starting point is very different to previous cycles, with a strong labour market, greater deleveraging and a generally more robust situation. This scenario means the effects of rate hikes are being delayed and may be lessened, as well as being the key to a mild recession.
- The post-COVID dynamics have allowed for a lengthening of the economic cycle, with runaway demand, resulting in many companies still now processing orders from over a year ago, in the midst of the post-COVID era. A situation that may start to contract in the coming months.
- Luis Buceta, Creand Wealth Management Investment Director in Spain, explains that “we are plotting a core scenario with a mild recession, as it is very unlikely that the economy will not notice a 500-basis point rise in so few months. The chances of the global economy declining are higher than the chances of nothing happening at all.”
- In relation to rising prices, Creand Wealth Management believes that inflation will slow largely due to base effects, but with periods of volatility, although it will remain at high levels as long as the strength of the labour market lasts. In any case, the firm believes that the forcefulness of rate hikes should end up causing a slowdown in economic activity, weighing on corporate earnings, something that current valuations are not discounting.
- Equities: defensive and quality securities
- Creand Wealth Management is opting for utmost caution in equities. The firm points out that we are facing a scenario with disparities in valuations due to fear of the macro situation, with cyclical sectors trading in a discounted scenario of recession compared to others, linked to technology or luxury sectors, which are performing very strongly.
- In general, the risk-return on equities is unattractive and asymmetrical. The market consensus continues not to discount declines in earnings that should materialise in the coming years.
- The firm explains that there are a small number of companies setting the pace on the markets, which has led to the NASDAQ’s best ever performance in the first half of the year, bolstered by the enthusiasm of companies related to Artificial Intelligence.
- In this scenario, Creand Wealth Management is opting to take refuge in defensive sectors and quality companies when building portfolios, while being selective, especially with those securities related to AI that have risen sharply in recent months. The firm is prioritising Europe over the US, as it is a geography that is not yet overvalued, more exposed to China and the financial sector, as opposed to the US, whose companies are characterised by excessive multiples.
- Fixed income: high credit quality with short maturities
- In the case of fixed income, the firm opts to take advantage of widening spreads in Investment Grade and financial debt, particularly in senior tranches, and warns of a certain underweighting in alternative assets, in a scenario where the opportunity cost of these products has fallen.
- Creand Wealth Management believes it is important to take advantage of the current scenario to selectively build emerging debt positions, in an environment of a front-loaded monetary cycle and subdued inflation, which should benefit from the falling dollar and the reopening of China. In this sense, it is opting for corporate bonds, paying premiums close to High Yield, but with higher credit quality. In particular, the management company sees potential in Asia, which is at a different point in the cycle than Europe or the US, with more room for manoeuvre and more attractive valuations. The firm is positive on China—on the investment side, not so much regarding the macroeconomic backdrop—as there is some weakening that has led the Chinese central bank to cut interest rates and raise expectations of more stimulus to struggling industries such as real estate. It also has a good outlook on India, the world’s most populous country, with growing consumption potential, which is also growing three times faster than other economies.
- Miguel Ángel Rico, Investment Director at Creand Asset Management, explains that “the upside potential of equities, in the best-case scenario, is no longer much higher than what we could obtain with fixed income assets, assuming much less risk”. Consequently, the firm is inclined to complete the portfolio with high quality fixed income assets with short maturities.
- On the currency front, Creand Wealth Management believes that the dollar is losing steam and, as rates become more attractive in the eurozone, investments are being repatriated. The firm expects a narrowing of the rate differential between Europe and the US, which will push up the euro. The company underlines the fall of the yen, due to the unsustainable monetary policy being developed by the Central Bank of Japan.
