What were the major recent events and what were the impacts on your asset class?
Well, the big event has been the backup in bond yields and in particular the backup in real yields. So real yields now are up close to around 2.5%, depending on which market you look at. And that is having ramifications for asset classes more generally. And I think will continue to have an impact. So yes, for us, that's definitely the major consideration. I mean, inflation, of course, is very important, but the story there has been playing out a little bit more in line with the expectations. So at least for now, that's taking a little bit more of a backseat.
What can your asset class offer in the current environment?
We have a lot of degrees of freedom in our asset class and certainly that's helped by the fact that we are able to go short interest rates. I think we're in for a difficult period more generally in terms of returns to capital. I think particularly because of the backup in real yields that we're seeing. I think it's very important from a risk management point of view in terms of how you structure trades. So within our asset class, we're able to go long one market and short another against it. I think that helps to mitigate some of the risks, certainly from any exogenous shocks. I think that's going to be particularly important. Despite some of the issues surrounding markets, I mean, not just a backup in yields, but also some of the geopolitical risks, volatility has remained reasonably low. So I think as investors, we also need to be mindful of the risks of a pick up in volatility over the coming months. And of course, we have to remember as well in the background, quantitative tightening continues at some pace. So none of these are particularly great factors for markets more generally and your traditional asset classes.
What’s your outlook in the near and medium term?
Over the coming months, I think the backup in real yields will remain central to investors' decision making. I think because central banks are still active and the reaction function from the various central banks is still quite different. That creates opportunity. You know, if we think back a couple of years ago, the big focus was inflation and that really dominated price movements. Last year it was much more about central bank tightening. This year it's more nuanced. I think more generally, if we're looking for a bigger theme, it's one in which rates are going higher and remaining higher for longer than many people expected. So markets are now pricing in much higher terminal rates. And I think that's something that's likely to remain over the remainder of this year. But as I say, it's a bit more nuanced in the sense that we have had quite a lot of tightening and that is beginning to work and beginning to be felt. So I could see an environment where you need to be a little bit more tactical where investors one minute are focusing more on stubborn core inflation, but then shifting at times their focus more towards the fact that policy is working and the lead indicators are showing signs of a slowdown and then perhaps at times becoming a bit more optimistic about the rate outlook. So, yeah, need to be tactical, I think.
Is there one chart you’re currently monitoring closely?
There's always numerous charts. I know in the past I've mentioned the importance of the US labour market and jobless claims. I think for now, however, though, real yields are really important because that has knock on effects, as I say, not just for bond markets but for asset classes more generally.
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Christian Munafo of Liberty Street Advisors notes an improvement in market conditions for investors in late-stage private companies; many of these companies are similar to what public market investors used to seek in small to mid-cap growth stocks. He also stresses that many of them are not just high growth, they are also at or approaching profitability.
Goro Takahashi describes the key factors that influenced the Japanese market over the third quarter, particularly the main stock exchange’s ongoing initiative to improve listed companies’ financial indicators, and the areas he thinks investors should focus on into the turn of the year.
Julian Howard reflects on the combination of stretched valuation and a tight equity risk premium that has made equities less attractive in the short term. However, it does not undermine the very long-term case for equities, in his view. He also notes the long-term structural case for China.
GAM Systematic’s Dr Chris Longworth and Guglielmo Mazzola highlight bond sell offs and a commodities rally as significant market events, and note that systematic investment approaches can help provide investors with much-needed diversification for their portfolios.
Atlanti’s Gregoire Mivelaz highlights the three major events of Q3 that impacted his investment universe: earnings, bond call dates and the reopening of primary markets. He believes given we are now in a late credit cycle, credit quality matters for investors. And he notes that market mispricing is continuing to lead to opportunities.
Jian Shi Cortesi notes that weak sentiment in China is keeping Chinese equities at very low valuations, due to the soft economic growth, real estate drag and the ongoing China-US rivalry. However, she is optimistic about long-term prospects, with the conviction that in the long term earnings growth will drive stock prices.
Niall Gallagher shares his views on the implications of rising real bond yields and why he thinks central banks will continue to have to fight inflation rather than deflation. Niall also discusses the sheer scale of capital required to enable the energy transition, and some of the companies he believes stand to capitalise.
At GAM Investments’ latest Active Thinking forum, David Dowsett reflects on why markets may have remained in relatively tight ranges in recent weeks, while Adrian Owens outlines his expectations for markets over the near- and medium-term, as well as where he sees opportunities going forward.
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