Portfolio managers at Los Angeles-based investment management firm Capital Group signaled their optimism for investing in the year ahead, despite—or perhaps because of—the uncertainty about the economy and direction of the markets.
The firm’s presentation, called “Outlook 2024,” was held at the New York Stock Exchange today, where Capital Group was scheduled to ring the closing bell as it celebrated its launch of 14 ETFs over the past 18 months, portfolios that so far hold $14.5 billion in assets.
The roundtable was moderated by Holly Framsted, head of global product strategy and development. Joining her were equity portfolio manager Grant Cambridge; fixed-income portfolio manager John Queen; and economist Anne Vandenabeele, who covers the U.S. and Japan.
According to Vandenabeele, the odds of a soft landing for the economy, once thought unlikely, have risen, as inflation is slowing without major blows to employment. But it’s not a done deal, she said.
One issue right now is that inflation is not slowing uniformly and has been higher in key areas, like healthcare. So while the Fed doesn’t need to continue to raise rates, Vandenabeele said, rates do need to stay where they are for a while.
“We have yet to see the full impact of the 550 basis points in rate hikes we’ve experienced over the last year of so,” she said. “We’re probably six to 12 months away from feeling that impact, so there could be more slowdown already in the pipeline that will affect households and companies.”
For example, about 15% of corporate debt will need to be refinanced over the next two years, and that could be a pressure point that pushes a soft landing off track.
As a fixed-income manager, Queen said he’s been intrigued by the conversations about higher interest rates and has felt that many people in the financial services have been suffering from “recency bias.”
“For most of my career, interest rates were [where they are now] or higher,” he said. “For the last 15 years rates have been extraordinarily low, the Fed’s had an enormous and ballooning balance sheet, and you had an environment where global disinflation was really the issue, so they were fighting against that, trying to get inflation up and couldn’t.”
But now that the Fed is trying to get inflation down, real rates are likely to remain higher for some time. Queen said anywhere around 4% to 6% would be reasonable, and still might trigger a recession.
“The economy in the U.S. is adaptive, and the longer we stay here the more people and companies get used to the rate levels and invest based on hurdle rates appropriate to those rate levels,” Queen said.
Cambridge agreed that current interest rates are not abnormal and added that with an estimated $6 trillion in investor assets sitting on the sidelines, now is the time to be back in the equities market. While there is a lot of uncertainty, he said, it is also the best time to be an active investor.
“There are more opportunities today; I am busier than I’ve ever been,” he said, noting that he entered the business in 1984. “This is just an incredible time to be leaning into a market which has a great amount of uncertainties.”
What he’s looking for, he said, are the companies that are adapting best to the higher rates and the other conditions they’re facing as they do business.
“It comes down to math. If you compound over long periods of time, you need to capture your rate of return off the bottom [of the market],” Cambridge said. “If you don’t capture that rate of return off the bottom, you dilute your long-term returns.”
In fixed income, Queen said, investing is fairly straightforward, as bond funds tend to match well with investor time horizons. If, for example, they’re looking for a place to park assets for two to three years, then a short-term bond fund with that time horizon is perfect, as the investor can avoid losing money to volatility, he said.
Nevertheless, it might be time for investors to move away from the cash and cash equivalents that have done so well, beyond what’s needed for the next three to six months.
“The problem with cash for any longer period is we know at some point the Fed will start to back down. It could be next year. It could be longer. We don’t know,” he said. “But it is a deteriorating asset. And if you're sitting in cash waiting for that timing moment, you're going to probably be too late.”
Vandenabeele said that she expects the dollar to remain strong on the international scene.
“If rates stay higher for longer, the dollar stays stronger for longer. High interest rates attract investors to U.S. assets,” she said. “It’s hard to imagine a scenario of a weaker dollar.”
For her, investment in Japan is particular appealing right now, she said, as the country seems to be on the verge of real wage growth and long-term developments in digital transformation that will make companies of all kinds more productive.
“There’s a big focus on increasing corporate efficiency,” she said. “Everyone’s focused on this. Over 40% of companies in Japan are trading below book value. If that could be lifted, that would be huge.”