Despite global growth slowing, many assets have recovered from losses in 2016, leaving investors struggling with a disconnect in the market.
In an investor update he wrote that imbalances in the economy are increasing at a greater speed and investors are unwilling to fight central banks, who are doing whatever it takes to stimulate growth.
‘The World Bank recently reduced its forecast for global growth from an already anaemic 2.9% to 2.4%. And inflation is muted across the globe, leading to weak nominal growth. World trade growth is beginning to contract and labour productivity is falling in both the developed and emerging markets,’ Michele said.
‘At the same time, leverage is rising – in the developed markets, it is government debt; in the emerging markets, it is corporate debt. Economies are using leverage to create growth, essentially borrowing from the future. Rising leverage, when combined with weak nominal growth, is a massive headwind, as debt affordability will eventually reach the breaking point.’
Michele added some companies are having trouble growing and may have to cut jobs and other costs to maintain profitability. However, the US Federal Reserve wants to create more inflation.
‘If we see wage pressures, the Fed may be forced to raise rates, which could trigger recession, but tighter lending standards, softening commercial real estate fundamentals, and recent rental housing price weakness all suggest that inflation is not a threat.’
High quality holdings
In terms of positioning, Michele looks for high-quality stocks. He has 22.4% of the fund devoted to US high yield corporate bonds. Although it is not cheap, Michele said it is supported by strong retail flows, and weaker fundamentals should improve.
‘Many US securities look attractive given the strong demand coming from Japan and the Eurozone, where negative interest rates are forcing investors to go cross‐border. While dollar denominated investments may not look attractive on a hedged basis, the higher yields in the US market provide a lot more room for capital appreciation,’ he said.
‘High quality, long duration government debt benefits in the near term from central bank response and potential easing and provides stability during periods of risk off. Higher rated, higher yielding securities, such as US high yield, European high yield, provide attractive carry and may continue to benefit from quantitative easing and the on‐going search for yield.’