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Insights from Giordano Lombardo, CEO & Co-CIO at Plenisfer Investments : Secular Trend Reversal
Macro

Insights from Giordano Lombardo, CEO & Co-CIO at Plenisfer Investments : Secular Trend Reversal

In his analysis, Lombardo outlines a significant shift in the macroeconomic and geopolitical landscape, emphasizing the reversal of a 40-year trend of declining interest rates.
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9 FEB, 2024

By RankiaPro Europe

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The secular trend of declining interest rates, lasting for 40 years, has reversed, and we have entered a new macroeconomic and geopolitical regime.

This has been our fundamental thesis for the past three years, and we remain convinced that the "new regime" will bring significant changes in investment approaches.

Influence of Fiscal Policies on Economic Activity

Firstly, we expect a super-cycle of investments in real assets (infrastructure, energy transitions, and digital initiatives), largely supported by public demand, both in the West and in Asia.

At the macro level, in the new regime, we expect a greater influence of fiscal policies on economic activity, after fifteen years during which ultra-expansive monetary policy has been the "sole player on the field." Additionally, we anticipate an average inflation level in the period higher than that prevailing in the previous phase. Hence, "higher for longer" interest rates, which, however, do not mean "high" in absolute terms; today's interest rates are not particularly high when compared to levels reached in the last 50 years.

Focus on Commodity and Energy Sectors

We believe in the centrality of commodity and energy sectors, which we expect will represent an opportunity after significant underinvestment in the last ten to fifteen years.

An example is uranium: we believe that the bull market that emerged in 2023 is destined to last in the long run. After years of a surplus market, stocks have depleted, the market has entered a deficit, and utilities have been forced to enter the spot market to purchase the material. Our outlook on uranium aligns with opportunities related to the energy transition: we believe that nuclear energy is the most efficient and "clean" solution to achieve it.

Focus on 2024: US rates, watch out for lagged effects

The U.S. economy was the positive surprise of 2023, remaining strong due to new fiscal stimuli that added to those post-Covid, bringing the budget deficit to 8% of GDP, a high number considering the still-low unemployment rate.

Contrarian View on US Economic Outlook

The U.S. economy was the positive surprise of 2023, remaining strong due to new fiscal stimuli that added to those post-Covid, bringing the budget deficit to 8% of GDP, a high number considering the still-low unemployment rate.

We disagree with the consensuswe believe that the delayed effects of the 2022/23 monetary tightening have not fully manifested in the economic system. An economic system that, in recent years, has seen a significant increase in debt, both private and public, which will need to be refinanced under much more burdensome conditions than in the past.

In case of a "credit event", or even a more pronounced recession than forecasted by the consensus, the Fed will not only cut rates but will return to injecting liquidity into the system (Quantitative Tightening interruption), leading to a resurgence of inflation. Holding positions in energy and commodities also serves as a hedge against this scenario.

Headaches from too much concentration

Today, equity market valuations are high in the United States, more in line with historical averages in Europe and emerging markets. Corporate bond spreads are historically low.

However, we have also to consider technical factors, what we at Plenisfer refer to as “market hydraulics”. The global stock market shows a concentration that has no historical parallels and is very dangerous.

80% of equity investment worldwide is benchmarked. This means that almost 2/3 of flows are directed towards the US market, and of these, 30% towards the "Magnificent 7" (US technology stocks). In 2023, the "Magnificent 7" provided almost all of the growth in the S&P500 index. However, this concentration, just as it determined a significant part of the index's performance during the upward phase, can have the same effect in a downward phase.

Looking ahead to 2024, then, what to do?

In Plenisfer, we will continue to focus on certain European industrial stocks, selected small caps, and "indirect beneficiaries" of the artificial intelligence trend.

The emphasis on energy stocks and commodity producers in "safe" jurisdictions remains unchanged. The uranium bull market is expected to last, as mentioned earlier.

2023 was also the year of gold, on which we remain positive, both in terms of further appreciation potential and its ability to serve as a portfolio stabilizer.

Looking at currencies, we believe that the dollar has entered a phase of structural weakness, following the decline in international demand for dollars to finance the purchase of commodities, while cyclically it could be affected by the expected drop in US interest rates.

Looking to the East, we expect a strengthening of the Yen. Contrary to other central banks (Fed, ECB), the Bank of Japan is expected to finally abandon the "yield curve control" policy in favor of a restrictive monetary policy.

On the equity and bond fronts, we continue to seek value in the energy and industrial financial sectors, despite a context of historically compressed spreads.

Lastly, China: the performance of the Chinese economy has been the disappointment of 2023. The expected recovery in domestic consumption after the post covid reopening did not occur.

What was already clear: China needs to recover from the indigestion caused by the huge past boom in real estate and will no longer be able to be the locomotive of the world economy for several years.

What has become clearer in the past two years: the goal of high economic growth is no longer on the agenda of Chinese leaders. 3% or 4% is more than enough (which is probably equivalent to an actual 1 or 2 percent).

China has a huge number of excess empty houses, more than 100 million units, and it cannot solve the problem by resorting to demographics: it has a low-growing population and a large chunk of its youth population unemployed. Therefore, it must gradually restructure the housing sector, recapitalize local governments and the banking sector, and eventually will be forced to monetize the debt.

Moreover, it is trying to restructure its economy one step at a time with "supply policies" (industrial policies, incentives for the production of electric cars, semiconductors, Artificial Intelligence-related software), but not with "demand stimulus."

Of course, this does not preclude the possibility of a cyclical recovery in 2024, which in fact is quite likely. But from a structural point of view, growth will be lower than in the past.

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