Three portfolio managers said Wednesday they are not convinced that the worst of the economic problems are over, as they predicted continued interest rate increases and high inflation.
It has been a tumultuous economy this past year with record-high inflation and the Federal Reserve raising interest rates in historic ways in an attempt to curb that inflation. While many believe these actions will lead to a recession, some say it has already occurred.
Economists were optimistic that inflation had topped out and would start to normalize. However, three portfolio managers speaking at San Mateo, Calif.-based Franklin Templeton Investments’ Megatrends Webinar this week expressed reservations about what could be happening in the months to come.
“Rates could have to go higher than we expected and inflation could be here longer, and if so we think that has continued ramifications for asset prices and volatility given the environment we are coming out of, which was a period of low volatility and very low interest rates,” said Michael Clarfeld, portfolio manager for New York-based ClearBridge Investments.
Matt Quinlan, a portfolio manager for Franklin Equity Group, echoed those sentiments, saying continued inflation and interest rates could lead to continued struggles.
“What makes us cautious is earning estimates, which are in some sectors too high in our view, and slowing growth, and those numbers need to come down,” he said. “What makes you nervous is when you see a rally—when numbers need to come down in some cases—[and] maybe there isn’t quite an appreciation for that element.”
While he stopped short of predicting a recession, Quinlan said that companies continue to struggle to increase profits and emphasized that estimates must come down. That specifically needs to happen in parts of the industrial sector and its subsets, he said.
Thanh Bui, a portfolio manager at New York-based Clarion Partners, agreed that there was still a lot of uncertainty in the markets over inflation and interest rates. Her focus is real estate, and she said there are areas in that space that will serve as opportunities for investors. In particular, she pointed to real estate debt as a potential opportunity.
“As rates have increased, proceeds from conventional senior lenders have tightened,” she said. “This has created a financing gap where … debt investors can come in and fill this financing gap at very attractive returns at moderate levels.”
The other portfolio managers agreed that while the situation may look dark, there are opportunities for advisors and investors. Clarfeld pointed to dividend-paying stocks as vehicles that serve as a reliable option during high inflationary times.