Liontrust MA Quarter In Review Q3-2022 15.11.22 (Spreads) - Flipbook - Page 18
NordStream Gas Flows at Greifswald (MCM/Day)
dollar is pushing commodity prices even further, making goods more
expensive to the rest of the world.”
160
120
The terminal level of interest rates in the current cycle is clearly of
paramount importance to fixed income markets. The current round of
rising rates has had a profoundly negative impact on fixed income,
especially this year, and when it peaks then that might present a
buying opportunity in bonds.
80
40
0
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Sep-22
Source: Liontrust & Bloomberg, as at 29.09.22
A European global strategist pointed to how Europe’s major gas
pipeline, Nord Stream 1, has been shut down and will remain so
indefinitely, while President Putin has threatened to cut all energy
supplies if price caps are imposed on Russia’s energy exports. “There
have been seven rounds of sanctions on Russia so far, and while
their feasibility raises scepticism, European countries are talking
about energy restrictions and cost-saving measures such as taking
cold showers and limiting room temperatures.”
Central bank activity has certainly ramped up over the course of
2022, with strong negative impacts on bond markets. A UK fixed
income manager notes that there has been a distinct change in central
Banks’ hawkish attitude. For example, the manager says, expectations
of rate rises by the Bank of England have been revised upwards to
an anticipated 5.5%. The manager says: “Discussions are focused on
how far central banks will tighten. Furthermore, if the global - and UK
- economies go into recession, which companies will suffer the most?”
A UK value-style manager believes banks are the most exposed in
such a scenario: “High rates are good for profits but if they get too
high then that will cause defaults.”
One region that has been hit by the rise in US interest rates – and
the subsequent strengthening of the dollar – is emerging markets,
which mostly pay for their imports and debts in USD and are
vulnerable to a slowing global economy. An Emerging Markets
manager says: “Emerging markets are having a hard time due to
the higher commodity prices, including energy and food. The strong
18 - Liontrust Multi-Asset Funds and Portfolios Quarterly Report: Q3 2022
A US fixed income manager comments: “The terminal Fed fund rate
is piercing 4% now. Whether the 10-year will break out or remain
anchored is still uncertain. If it remains anchored, there will be a risk
of a yield curve inversion, which is rare and has typically coincided
with significant market drawdowns. Investors are wagering the Fed
will not overtighten while the risk of a hard landing is rising.”
A global fixed income manager believes that the hope of the Fed’s
pivot is premature: “Based on the current direction of inflation, it
seems that further rate hikes are needed to achieve the Fed’s 2%
target. Whether 4.0-4.5% of the Fed fund rate is enough to bring
down inflation remains questionable. The Fed is expected to go into
a holding pattern in the coming year to assess the delayed effect of
its monetary policy.”
According to a European fixed income manager, bonds are resuming
their role as a diversifier: “Since 1930, after the period of stocks and
bonds falling together, the 12-month bond performance has been
positive every time with an average return of 11%. Two-year yield
is hovering around 3.5%, providing a good guide to future returns,
which suggests a stronger outlook than for most of the era of the postGlobal Financial Crisis.”
Although a global recession is clearly a possibility and would be
impactful for financial markets, our own view, as often stated, is
that a shallow downturn is more likely than a protracted downturn.
The latest data from the US showed, for example, that its economy
expanded in Q3 after mild contractions earlier this year. The world’s
future economic direction is far from certainty, however, and we are
always open to hearing different views.
