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Last weekend the Jackson Hole meeting took place with the world’s great central bankers, academics, finance ministers and some directors of large private companies. They get together every year todiscuss the state of the global economy and the challenges it faces. Although, in general, its content and consequences are quite unproductive, this meeting was especially relevant because of what Jerome Powell, President of the Federal Reserve (Fed), said.
really nothing unexpected
Powell announced a year ago on the same stage a change in the way of defining the inflation and employment objectives of the institution he directs, making them more flexible and with the purpose of “achieving aaverage inflation of 2% in the long run“. That speech has been extreme as American inflation skyrocketed in 2022 (currently at 8.5% year-on-year and 6.3% accumulated in the year).
Hence, the President of the Fed, faced with the choice between the greater pain that an even more uncontrolled inflation would cause, and a lesser one, the one that a tougher monetary policy would inflict on families and companies, confirmed the second option, that is, , thatThe Fed’s priority is to control inflation.and that monetary policy will have to remain tight for a while. Those, “data dependent“or depending on the data that becomes known, the most relevant being the CPI for August (it will be published on September 13) which might moderate for the second consecutive month thanks to the continuation of the drop in fuel prices.
On the part of our ECB, the reasoning was very similar to Powell’s: even knowing that rate hikes will weaken the labor market, he warned that “if price stability is not restored, the pain will be much greater”. Nevertheless,for the ECB the situation is more complicatedthan for the Fed since, with the process of raising interest rates already begun on both sides of the Atlantic, the US is starting from a situation of practically full employment while in Europe the economy is weaker and the risk of recession is higher than ever before. any member of the European banking regulator. In the background, the so-called “fragmentation” (some countries like Italy pay more and more for their debt than others) and the consequent weakness of the Euro that imports more inflation to the Eurozone.
In short, what was said in Jackson Hole was not really unexpected, despite the fact that some hoped for a less aggressive message regarding interest rates following the reduction in the July CPI in the US. Still, equity markets reacted withsharp declines discounting the foreseeable drop in profitswhich, following a favorable period of publication of results in the second quarter, may come in the still unfinished third quarter of 2022. Overreaction? In my opinion, without a doubt, but the downward slide of the indices will surely continue in the coming days.
Conclusions for an investment portfolio
With high inflation, high rates, high nominal GDP growth but with real GDP (subtracting for inflation) weakened by lower business activity and falling employment plus price-weighted consumption, I believe the best investment approach is to focus on :
– las actions that show qualitydividend yield and value instead of growth,
– take advantage of the falls in the price of fixed income in the first semester and the presumable positive future for credit – private bonds – instead of government bonds,
– and keep counting on real assets and among them raw materials (however, their prices might weaken if the global recession is really deep, a scenario that is still unlikely due to the strength that the Chinese and American economies still maintain, at least apparently).
As a sectoral investment, the financial sector it can stand out from others because, as the ECB itself acknowledges, higher rates will have a “negative, although contained” impact on the solvency of entities, although the balance of the new context will be positive for the sector.
Finally, the liquiditymuch better paid than a few months ago and the strategies of relative value they continue to make a lot of sense in portfolios, especially in those with a more cautious bias, as well as prioritizing investment areas linked to sustainability, the digital world and health which are supported by solid structural factors, and also agriculture/agribusiness in the face of the still complicated geopolitical situation.
All this carefully choosing both the managers and the weights in the portfolio and the timing.
In other words, especially now, take good care and be prudent.
twitter: @GSantos_A
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