(Bloomberg) — Some of the world’s biggest investors are looking beyond rate hikes, bank failures and the threat of a recession to one of all investors’ biggest fears. money management – miss the next big rally.
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For the trillion-dollar investment conglomerates Franklin Templeton, Invesco and JPMorgan Asset Management, the growing financial instability in Silicon Valley Bank, Credit Suisse Group AG and First Republic Bank is a signal to pick up speed. preparation level.
They believe the impending slowdown in the US and elsewhere will prompt central banks to return to looser policy, triggering a fresh rally higher in the market.
“If you miss the start of the bull run, you miss out on most of it,” said Wylie Tollette, chief investment officer of Franklin Templeton Investment Solutions, a $1.4 trillion fund manager. profit. “It’s very hard to catch up if you miss the first week or two. Sometimes it’s just a few days.”
That forced big investors to flock to longer-term bonds, look out for big losers over the past year like tech stocks, and selectively buy riskier assets like private equity. core.
bonds
“Fixed income is back,” said Tollette from Hong Kong during a trip across Asia to meet big investors. His firm is adding longer-term government bonds from the US, UK and Germany.
JPMorgan’s investment division has been buying more long-term Treasuries for its fixed-income portfolios in recent weeks despite the potential for losses if interest rates rise again. Bob Michele, chief investment officer who helps oversee $2.5 trillion in assets, says the risk of holding too few bonds as the Federal Reserve pivots causing a rally is greater than any other. any price drop in a short period of time.
“My biggest concern is not that we buy now and yields go up by 50 basis points,” he said, noting that prices are still at their cheapest since the financial crisis. The bigger worry for him is being kicked out of the market when the situation changes.
The Australian Retirement Trust, one of the nation’s largest pension funds with $159 billion in assets, is another investor that bought back government debt this month.
“We have reset our fixed-income neutral position across the fund,” said Andrew Fisher, head of investment strategy at ART. Pensions are expected to move into the overweight position as output rises slightly higher.
share
Invesco, which oversees $1.4 trillion in assets, predicts the Fed will pause in the coming months before moving into an easing cycle later this year, triggering a stock market rally.
“If a recession hits in the second half of 2023, the stock market should expect a recovery in 2024,” said Kristina Hooper, global head of market strategy at the fund management firm. “Tech names have responded very well to falling yields, which is a positive sign overall for stocks.”
Invesco will be looking at overcapacity in cyclical and small-cap stocks as signs of a Fed pivot become more apparent, while reducing caution in large- and defensive-cap sectors, like utilities and essential consumer goods.
According to Rob Arnott, president and founder of Research Affiliates LLC, stocks with low price-to-earnings ratios in developed markets like Europe, the United Kingdom, and Australia offer compelling opportunities.
“I would be at risk in markets outside of the US, both in developed and emerging markets,” he said. He points to UK stocks, which trade with a price-to-earnings ratio of about 10 to the S&P 500’s nearly 18, because of a valuation mismatch that investors can exploit.
Franklin Templeton is preparing to switch from underweight to neutral to avoid missing out on the early stages of a rally.
Data from JPMorgan shows that investors with the S&P 500’s best 10-day absence in the two decades to 2022 received half as much return as market participants over the entire period.
Credit
Investment-grade corporate bonds have emerged as one of the most popular overweight positions among investors seeking higher yields than government bonds, with moderate risk.
“You don’t have to lower your credit range to get a yield right now,” said Emily Roland, co-head of investment strategy at John Hancock Investment Management, a $610 billion asset management firm. .
The company has outstanding positions in investment-grade corporate bonds, mortgage-backed securities and municipal bonds. It will add riskier debt like high-yield corporate bonds as worsening economic conditions prompt the Fed to pivot.
Mohamed El-Erian, president of Gramercy Funds Management and an advisor to Allianz SE, is also looking at emerging markets.
“The credit segment in particular offers attractive opportunities,” he said. “The key here is a combination of careful name selection with an emphasis on the balance sheet.”
But moving too quickly into riskier credit areas can have its downside, as Invesco learned this week. The fund manager was a holder of Credit Suisse’s additional Tier 1 bonds that were written off over the weekend.
currency
The dollar will lose a key driver of strength as the Fed begins to cut rates, while also attracting investors to it as a haven during recessions.
“We could see a slightly weaker dollar as well as we could see a less aggressive Fed. Those two will go hand in hand,” said Invesco’s Hooper.
Some investors see it going the other way.
“We’re in a stronger dollar camp,” said John Hancock’s Roland. “As the global markets start to realize that a recession is the most likely outcome, you will get bids in US dollars. That is an important factor to watch and one that will have an impact on assets.”
JPMorgan’s Michele is also bullish on the yen when Kazuo Ueda succeeds Haruhiko Kuroda as Bank of Japan governor in April.
“Ueda-san will begin the policy normalization phase and things like yield curve control will be phased out,” he said. “That will cause repatriation of assets back to Japan and you will see a lot of that flowing into yen assets.”
Private market
Private markets, which provide sizable returns in times of low interest rates, have been slow to value the impact of the tightening cycle.
That leaves them vulnerable when a recession looms, and Michele is particularly worried about private credit. But in the uptrend and in the long term, others are hunting for opportunities.
According to Franklin Templeton’s Tollette, in private markets and elsewhere, investors should be selective about their holdings rather than curtailing their allocation.
“It is always darkest before dawn,” he said. “If you wait for the real pivot, you will be too late. You have to anticipate that.”
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