Source: Zhitong Finance
Author: Ma Huomin

Big investors are turning their eyes from rising interest rates, bank failures, and the threat of economic recession to one of the biggest concerns of all fund managers — missing out on the next big rebound.

The Zhitong Finance App learned that for the trillion-dollar investment groups Franklin Templeton, Invesco, and J.P. Morgan Asset Management, the intensification of financial turmoil caused by Silicon Valley Bank, Credit Suisse, and First Republic Bank is a sign of speeding up preparations.

They are convinced that the economy of the US and other regions is about to slow down, which will prompt the major central banks to switch back to easing policies, thereby spurring the market to soar again.

“If you miss the start of the rebound, you're missing out on most of the rewards,” said Wylie Tollette, chief investment officer at Franklin Templeton Investment Solutions. “If you miss week one or two, it's hard to catch up. Sometimes it's just a few days.”

This thought promptedLarge investors increased their holdings of longer-term bonds, kept an eye on stocks that fell sharply last year, such as technology stocks, and selectively purchased riskier assets such as private equity credit.

debentures

“Fixed income is back,” Tollette said. He is meeting big investors all over Asia. His company is increasing longer-term government bonds in the US, the UK, and Germany.

J.P. Morgan's investment division has bought more long-term US Treasury bonds in recent weeks, although the sector could suffer if interest rates soar again. Bob Michele, chief investment officer of the fixed income division of J.P. Morgan Asset Management, said that when the Federal Reserve turned to stimulating a market rebound, the risk of holding too few bonds outweighed the risk of short-term depreciation.

“My biggest concern is not that we are buying now and then the yield will rise another 50 basis points,” he said. He pointed out that prices are currently still close to their lowest level since the financial crisis. For him, the bigger concern is to exit the market when the situation is reversed.

The Australian Retirement Trust (ART) is one of Australia's largest pension institutions, with assets of $159 billion. The fund also began buying back government bonds this month.

“We have adjusted the fixed income position of the entire fund to neutral,” said Andrew Fisher, head of investment strategy at ART. The fund expects to shift to increasing these positions when yields rise slightly.

stocks

Invesco, which manages $1.4 trillion in assets, expects the Federal Reserve to suspend interest rate hikes in the next few months and then switch to an easing cycle later this year, thereby spurring a rebound in the stock market.

“If the economic downturn occurs in the second half of 2023, the stock market will recover in 2024,” said Kristina Hooper, chief global market strategist at Invesco. “Technology stocks will respond positively to declining yields, and declining yields will also be good for the stock market as a whole.”

As the signs of the Fed's shift become more clear, Invesco will consider increasing its holdings of cyclical stocks and small-cap stocks, and abandon its cautious stance on large-cap stocks and defensive stocks such as utilities and essential consumer goods.

Rob Arnott, chairman and founder of research firm Research Affiliates LLC, said that stocks with low price-earnings ratios in developed markets such as Europe, the United Kingdom and Australia provide attractive opportunities.

“I will hold risk exposure in developed and emerging markets outside of the US,” he said. He pointed out that the price-earnings ratio of the British stock market is about 10 times, while the price-earnings ratio of the S&P 500 index is close to 18 times. Investors can take advantage of this valuation mismatch.

Franklin Templeton is preparing to switch from reducing stock holdings to holding stocks to avoid missing out on the early stages of the rebound.

According to J.P. Morgan data, in the 20 years ending 2022, investors who missed the top 10 trading days of the S&P 500 index received half of the earnings of investors who held stocks throughout the period.

crediting

Investment-grade corporate bonds have become one of the most popular positions.

Emily Roland, co-chief investment strategist at John Hancock Investment Management, said, “Now you don't need to get benefits by lowering your credit rating.” The company has $610 billion in assets under management.

The company increased its holdings of investment-grade corporate bonds, mortgage-backed securities, and municipal bonds. When worsening economic conditions prompt an early shift from the Federal Reserve, the company will increase riskier bonds such as high-yield corporate bonds.

Mohamed El-Erian, chairman of Gramercy Funds Management and Allianz Insurance consultant, is also focusing on emerging markets.

“The credit sector in particular offers attractive opportunities,” he said. “The key is to carefully select investment targets while keeping an eye on the balance sheet.”

But entering the riskier credit sector too quickly could have adverse effects. Invesco is the holder of Credit Suisse Tier 1 Capital Bonds (AT1), which were written down to zero over the weekend.

currency

When the Federal Reserve starts cutting interest rates, the dollar will lose a key driver, but at the same time, it will also attract investors to see the dollar as a safe haven in times of economic downturn.

“We may see the dollar weaken, and we may also see the Federal Reserve less aggressive. The two will appear at the same time,” Invesco's Hooper said.

Some investors think the opposite is the case.

“We are in the strong dollar camp,” John Hancock's Roland said. “As global markets begin to realize that a recession is the most likely outcome, people will buy dollars. This is an important factor to watch, and it will have an impact on all assets.”

J.P. Morgan's Michele is also optimistic about the yen because Kazuo Ueda will succeed Haruhiko Kuroda as the governor of the Bank of Japan in April.

He said, “Kazuo Ueda will begin a period of policy normalization, and measures such as yield curve control will be gradually abolished.” “This will cause assets to flow back to Japan, and most of these funds will flow into Japanese yen assets.”

Private market

Private equity markets have offered impressive returns in an era of low interest rates, but have been slow to respond to the effects of the austerity cycle.

As the recession looms, this makes the private equity market vulnerable now, and Michele is particularly concerned about private credit.

However, Franklin Templton's Tollette believes that in the private equity market and elsewhere, investors should selectively hold assets rather than drastically cut allocations.

“It's always darkest before dawn,” he said. “If you wait for the real turning point, you'll be too late. You have to anticipate it.”

Editor/Somer