Ayer hubo un severo castigo al
que faltaba por caer, el Nasdaq, los valores tecnológicos, las FAANG (Facebook,
Apple, Amazon, Netflix y Google). Llevaban un recorrido endiablado fruto de ser
las inversiones de moda en los últimos años. Les queda recorrido a la baja y
esperemos que no afecte más al resto de mercados que ya habían recortado antes.
Interesantes previsiones:
If you have been invested in the U.S.
equity markets over the past five years, you have experienced a solid return
and resurgence in the market value of your investment portfolio. In its basic
form, a capital market, is simply a mechanism for pricing risk. Over the past
five years, we have seen increases in prices on publicly traded risk assets,
such as stocks and high yield bonds. However, markets are not necessarily
efficient at pricing risk all of the time. Equity investors have been richly
rewarded over the past five years in spite of growing global risks. However, this period of rising
equity prices and low levels of volatility is about to be tested as the global
economy transitions and capital markets adjust to higher interest rates. The
risk premium, which investor’s demand on risk assets, needs to adjust higher.
The
U.S. economy is performing extremely well and remains one of the stronger
pillars in the global economy. The unemployment rate is near record lows, wage
inflation is taking root, and consumer confidence is high. In addition, excess
resources that have persisted in the economy for many years are being put to
use as capacity utilization improves and occupancy rates in real estate
increase. We are even starting to see improvements in productivity gains that
have been illusive throughout this period of economic growth.
After
working through the Financial Crisis and slow economic growth that followed, we
believe an inflection point is near. The Financial Crisis required massive
Federal Reserve intervention, such as regulatory bank reform and quantitative
easing, resulting in distorted economic and capital market activity. We are now
experiencing an economic period unlike any other in history. This is evidenced
by a zero percent real Fed Funds Rate and $4.2 trillion in debt on the Fed’s
balance sheet, which it had purchased in the open market. As a result,
comparisons to past recoveries provide little guidance. So, within our
investment matrix, we continue to cling to those things we are clear on:
1.When money supply grows, prices of financial assets
rise.
2.When central banks reduce interest rates to low levels
and keep them there for a long time, asset prices increase.
3.When monetary policy shifts tighter, volatility
increases and markets inevitably dislocate.
4.The credit cycle still exists.
It
is important to separate the corresponding impact of the cumulative regulatory,
political and central bank decisions on the economy from its impact on the
capital markets.
The Economy
The
U.S. economy is in the sweet spot, and we estimate current growth of around 3.0%
as both the business and consumer sectors continue to show resilient strength
this year. The continued improvement in job growth and employment is
contributing to increased consumer strength, which in turn, supports growth in
Retail Sales evidenced by a 5.3% increase over the summer. We expect the
economy to show continued strength through the first half of 2019, and we
predict it will begin to slow in the second half as the impact of higher
interest rates takes effect. With stronger aggregate demand, the risk of a
higher pace of inflation is real, as supply of labor tightens and raw material
prices ratchet higher. The consumer, construction and energy sectors are
showing solid growth. However, declines in auto sales and housing are early
signs of the potential shift in economic activity.
While
the domestic economy is humming along, capital market activity is giving us
some heart burn. When we talk about the capital markets, we include publicly
traded stocks and bonds, as well as other investable asset classes, such as
leveraged loans, real estate, and private equity. The transition from prolonged low
levels of interest rates to a higher interest rate environment will inevitably
cause dislocations in asset prices. Higher interest rates result in
lower valuations. This happens as discount rates adjust higher on private
equity transactions, the risk free rate moves higher when valuing private
investments, and cap rates move higher when valuing real estate investments.
Monetary Policy
Even
though the Federal Reserve is two years into its tightening cycle, monetary
policy still feels accommodative. The
Fed has pushed short term interest rates higher eight times over the past two
years and the Fed Funds rate is now at the same level it was at leading up to
the Financial Crisis in 2008. However, the tightening cycle includes more than
simply adjusting short term interest rates higher. The velocity of money and
private credit expansion have been impediments to the acceleration of growth
over the past ten years.
Business
formation and economic growth has also been muted by the abysmal rate of loan
growth from the banking sector. Growth in C&I loans over the past two years
has been particularly weak. As a result, risk has been pushed from the banking
sector into the private markets, where more lending now occurs. When the credit
cycle turns down, the private investors will feel the brunt of it.
Based
on the strength in the domestic economy, we expect the Federal Reserve will
raise rates another 25 basis points in December. However, with Brexit on the
horizon, we expect there to be a global pause in monetary tightening to allow
for sufficient liquidity in the global markets. In addition, we expect the Fed
to begin talking about “a pause” in its rate hike program as uncertainty in the
economic growth begins to form in 2019.
International and Emerging Markets
At
some point, we expect the market will no longer ignore the growing risks
weaving through the global capital markets. These risks include a collapse in
emerging market economies such as Brazil, Turkey and Argentina, the growing
trade war with China, a huge debt growth in global developed economies
supporting spending and economic growth, the ill-fated exit of Great Britain
from the European Union, and the growing populist movement throughout Europe.
We
have always pointed to Italy as the growing problem for Europe. Following the
European financial crisis, Italy did not fully implement the austerity measures
it promised. The Italian government kept spending, and through its budget
deficits, the country has become the fourth largest public bond market. Last
week, with its huge debt burden, weak banking system, and unwillingness to
reign in its fiscal spending, Italy’s new government delivered the
irresponsible budget we had expected. The populist movement wants lower taxes and higher spending on
social programs, which the country can’t afford. Trouble will come once the European
Central Bank stops its quantitative easing program, which includes purchasing
Italy’s debt. At
3.50%, the yield on 10 year Italian bonds is only 30 basis points away from the
yield on 10 year U.S. Treasury bonds!
China
is another major risk for investors. This
risk has more to do with shifting U.S. policy toward China, which was
underscored in an important speech that Vice President Mike Pence gave at the
Hudson Institute last week. Reminiscent of Ronald Reagan, Vice
President Pence bluntly accused China of abusing its economic power, bullying
American companies and stealing their intellectual property. With the exception
of the tariffs imposed on China, we believe the majority of tariff initiatives
will be short lived and illustrate a strategy to renegotiate trade
relationships with strong partners in a manner that, at the margin, better
serves U. S. Companies. However,
we do not expect trade with China to be a simple matter of settling on tariffs
for exports and imports.
Vice
President Pence’s speech reveals a much broader agenda toward China, which
addressed China’s stealing of intellectual property for its own technological
gain, its growing military and reach into the South China Sea, and its position
within the global economy. The resolution of these issues will be long and
arduous, and the tariffs on Chinese goods may persist for a long period
depending on how the administration develops its agenda. While President Trump has
demonstrated his preference to get issues resolved quickly, the resetting of
U.S. – China relations and foreign policy will go on for many years. We expect
the uncertainty of U.S. policy and the disrupting impact of domestic supply
chains to weigh heavily on domestic markets. We believe that
U.S. policy is designed to hurt China’s already weak economy, which is showing
slowing growth and an increase in problem loans. Last week, China reported an
increase in the equivalent of $174 billion in liquidity into its capital
markets. A sustained enforcement of tariffs, which now total over $250 billion,
will have a negative impact on China’s economy.
Get Ready Because Trouble is Coming
There’s
no other way to say it - the financial position of the United States is a
disaster. After the Financial Crisis in 2008, the
government went on a spending spree designed to stimulate economic growth. As a
result, the U.S. has run budget deficits every year since 2001. The current
budget deficit is projected to reach $650 billion in 2018. The total debt as a
percent of Gross Domestic Product is now at 100%, a level not seen since the
end of World War II.
We
have benefited from nine years of ultra-low interest rates, which have helped
to inflate asset prices. It worked. Now, as the Fed pushes short term interest
rates higher, we expect asset prices should decline. A sustained shift higher in short term interest rates
will most likely lead to increased volatility and some dislocation in equity
markets.
Investors
are used to being spoon fed by the Federal Reserve, and the financial press
leads investors to believe that this low interest rate environment and record
setting stock market will continue. In a recent interview with Bloomberg,
Federal Reserve Chairman Powell even commented: “there is no reason to think
this cycle can’t continue for quite some time, effectively indefinitely.”
We
are always looking for indications of excesses in capital markets. We view the
strong growth over the past 5 years in real estate development, leveraged
loans, and high yield debt as three signs of excess developing in the domestic
capital markets. In addition, the decline in the quality of loan covenants in
leveraged loan transactions is a concern, and generally, it is presage of a
decline in valuations.
Prudence
would dictate reducing risk in portfolios given the shift in monetary policy
toward higher domestic interest rates. Interest sensitive sectors, such as autos and
home builders, are having a rough year with Ford and General Motors stocks down
16.6% and 22.7% over the past twelve months respectively. The dichotomy in
performance between stocks in the “old economy” and “new economy” is
significant and continues to warp the structure and performance of Index and
Exchange Traded Funds. Ultimately, we believe we are moving into a period that
will benefit the “stock pickers” approach to managing portfolios.
At
the end of the day, valuation matters for investors. The “Follow the Herd”
strategy and late stage market aggressiveness is more often an ill-fated and
dangerous strategy.
While it is impossible to predict the timing, here’s
what to expect in the near future:
Central bank balance sheets will continue
to shrink, which will put additional pressure on interest rates to rise.
Credit quality will deteriorate as
corporate balance sheets show higher leverage. Expect more downgrades
than upgrades from the rating agencies.
As the credit cycle begins to turn, we
expect an increase in debt restructuring and bankruptcies.
Stock buy backs will continue and take
priority over capital investment.
Volatility will increase as capital
markets adjust to higher interest rates.
The pace of earnings growth in 2019 will
begin to slow, as year-over-year comparisons become tougher after the initial impact
of Tax Reform on earnings subsides.
With higher capital levels and relatively
solid loan portfolios, U.S. banks will weather market turbulence well.
Corporate reorganizations will increase in
late 2019, resulting in a rise in bulk layoffs.
Expected returns in financial assets will
be lower than normalized historic returns.
Abrazos,
PD1: ''El perdón es una
decisión, no un sentimiento, porque cuando perdonamos no sentimos más la
ofensa, no sentimos más rencor. Perdona, que perdonando tendrás en paz tu alma
y la tendrá el que te ofendió'', Santa Teresa de Calcuta.
Todos los días tenemos que
perdonar a alguien, por tonterías, por pequeñas ofensas que nos hacen. Y mira
que cada vez que rezamos un Padrenuestro lo decimos: “…como nosotros perdonamos
a los que nos ofenden…”. Por eso el Señor cuando nos dijo cómo rezar hablo de
esto y no de otras cosas…
