We continue to advocate our ‘everything breaks’ portfolio. The core rationale is that we are entering a new regime of higher interest rates – something investors have not faced for a decade. Constant talk of a ‘Fed pivot’ shouldn’t come as a surprise as investors are not used to high rates. They have been buying equities, property and crypto for the past decade – all of which have benefited from low rates. But the economic reality has changed, inflation is rampant and central banks are likely to end up raising rates more than most expect. The Fed recently said as much.
What is the state of inflation? Well, looking at the consensus view of economists, only Japan and Switzerland will see average inflation of 2% or less in 2023 (Chart 2). Meanwhile, UK and Spain inflation are expected to be over 6%, Germany inflation is expected to be 5.5% and US inflation is expected to be 4.5%. With that backdrop it’s hard to see why central banks would be willing to end their hiking cycles any time soon.
With this backdrop, we continue to like to be overweight cash. This preserves one’s capital and is now starting to offer more attractive yields. Remember, at the start of 2022, the Fed policy rate was 0.25% and today it is 4%. This means all short-term interest rates should move accordingly. The interest earned on your bank deposit tends to be the last to move, but one can shop around for higher interest rates on short-term deposits. For reference, safe US 3m government bills offer 4.1% interest, while slightly higher risk 3m commercial paper rates are 4.4%. This means that one should be able to find savings products that offer interest around these levels. For the UK, the yields would be around 3% and for the Euro-area, it would be around 1.5% (Chart 3).
Elsewhere, we think most assets will underperform whether equities, bonds, property or crypto. That’s why we continue to underweight or neutral on all of these. The wildcard are commodities – where we think that the medium-term picture is bullish energy, but recession worries are near-term bearish. For now, we remain neutral on commodities.
Finally in terms of equity sectors we like to be long energy, financials, healthcare and short consumer sectors and tech. Our full list of sector views can be found here.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.