Do the central banks have our backs? This question was debated by buyside strategists at the Fixed Income Leaders Summit on Friday.
“We believe in a soft landing. It’s our base case”, said Desmond Lawrence, senior investment strategist at State Street Global Advisors. Having previously doubted central banks over inflation, he had since changed his mind. “Do central banks have your back? Actually, they do have your back, and they’re quite accommodating”.
The other panellist took a more negative stance on macroeconomic prospects, pouring cold water on Lawrence’s sunnier outlook.
“The bubble economy is still out there”, said Graeme Leach, CEO and chief economist at Macronomics, who cited recessionary indicators such as an inverted yield curve, record low unemployment and housing unaffordability as reasons to worry.
SSGA’s Lawrence agreed that political risk could affect the market.
“Clearly a Trump victory has consequences for rates and inflation. A Trump victory has consequences for the long end of the yield curve. A Trump victory has consequences for the dollar.”
But downside risks would affect equities first, Lawrence argued. “On the equity side, we’ve seen narrow leadership that’s persisted for some time. It’s a market cap world, but if we get a rollover in earnings, and that gains momentum, that’s when you need to start thinking a degree of portfolio protection which is back to your bonds”. Gold and currencies were also good downside hedges, Lawrence added.
Bonds were not a safe haven, Leach responded, adding that ‘Japanification’ of China was another threat, compounded by what he called an ‘explosion’ in debt levels. As a final corrective to complacency, Leach analysed US election forecasting, outlining what he claimed was a systematic 2-3% under-estimate in Donald Trump’s poll numbers. A Trump victory was ‘baked in’, Leach said.
Lawrence conceded that there was a potential downside for bonds as well, starting with the fundamentals.
“The sheer scale of US outstanding debt, the deficit has grown by an extraordinary amount in the last four years”, he noted. “Does that unhinge 30-year treasuries? Under certain scenarios it’s very difficult to pretend protect against that. So, for example, if we get a major escalation in the Middle East, we could have something like stagflation back on the agenda. Your bond portfolio is going to struggle to protect you there.”
©Markets Media Europe 2024
