Article published in elEconomista on October 7, 2024.
After 24 years at Credit Suisse, where she eventually served as Chief Investment Officer for EMEA, Nannette Hechler-Fayd’herbe joined Lombard Odier in January, where she holds the same role and also leads strategy. investment, sustainability and analysis for the Group. The investment director presents to us the vision she has today of the markets and the macroeconomic situation in general. She offers some enlightening conclusions – the new reality that central banks are facing, Europe’s big problem or the consequences for the Fed if Trump wins the election – as well as her view on the assets whose levels are attractive right now. Finally, it supports the appeal that bond investments have today on the stock market.
Today, political decisions matter more than just monetary policies
The rate cut cycle has begun. Will we see a rise in all assets again in the wake of stimulus, or will things be different this time?
The world has changed a lot after the pandemic. Today, political decisions matter more than just monetary policies. We can say that before Covid, central banks played a key role in defining economic policy. Indeed, after the debt crisis in Europe and the euro zone, budgets were under constraints. There was no shortage of reasons that limited the size of this part of monetary policy, leaving central banks free rein. I believe that politics is, overall, making a comeback. Take the US elections for example: everything has an impact on rising prices and the outlook for inflation.
Could a new inflation peak occur?
Looking at the long-term inflation outlook in the United States, for example, the 10-year breakeven rate recently returned to 2.2%. It is essential that it finds the 2% threshold. Central banks have worked hard to reach this level, and now policy is having an impact on the inflation outlook. Trump is proposing to increase tariffs overall, which could have consequences, even temporary, on the level of prices and inflation.
And regarding the labor market in the United States facing the migration issue, a drop in the number of job seekers could generate tensions in this market, which could lead to wage pressures. This phenomenon may have repercussions on rising prices in services, until a migration policy facilitating legal immigration is applied again.
My point is that politics will have a role to play. We could go through a transition period during which inflation starts to rise again and central banks will have to react and step on the brakes. Our expectations, for example, do not rule out the possibility that the Fed, in the event of Donald Trump’s return to the White House, will not be able to lower rates to the final level of 3.5%, as its forecasts indicate. announce. On the other hand, a victory for Kamala Harris would not disrupt current policy on trade or the labor market as much. The Fed could thus carry out its plan and continue cutting interest rates in the coming months.
Where to find value in the markets?
I still believe there are good reasons to invest in bonds. Rate levels in the Eurozone, bond yields, etc. still make it possible to obtain real remuneration. Real returns remain positive and anyone looking for an element of diversification for their portfolio must make room for bonds. In euro-denominated debt, investment-grade corporate securities offer good opportunities.
In global equity markets, the earnings yield of stocks, on the whole, generates returns comparable to investment-grade corporate bonds
In global equity markets, the earnings yield of stocks, on the whole, generates returns comparable to investment-grade corporate bonds. As performances are at the same level, we maintain a neutral positioning vis-à-vis the shares. An overweight would make sense in certain markets where we see value but, in general, this is not the case at present.
What do you think will be the impact of the crisis in China on the global economy?
Interestingly, China has a disinflationary effect on the rest of the world. This is something that happened with the process of globalization between the years 2000 and 2016. The disinflationary effect was then very marked. Most central banks had to fight deflation during this period. In today’s multipolar world, where globalization has given way to the construction of new international relationships and different supply chains, this disinflationary effect is limited.
Chinese authorities have just launched a package of coordinated stimulus measures aimed at supporting economic growth and financial markets. With this new boost in China, the authorities have regained some room for maneuver and the markets have reacted strongly. That said, these new measures do not address the country’s long-term difficulties. We therefore remain cautious. Of course, if other producers were to replace China, this would generate additional costs, which could accelerate price increases. However, for the moment, China, given the current management of its development, will remain a factor of disinflation. Furthermore, it will be international policies that will determine the extent of this disinflationary effect.
Are the measures included in the Draghi report best suited to improving productivity in the euro zone?
The plan proposed by Mr. Draghi places a strong emphasis on investment. One of the reasons why the United States has outpaced Europe is that the country has invested more. We must ask ourselves who is financing investments of this magnitude.
I believe that Europe’s problem is that it self-regulates too much. Regulation is one of the elements that distinguishes Europe. The tougher it is, even if it is with the best intentions (climate, financial stability, etc.), the greater the risk of going too far. So it’s not surprising that we don’t see much investment. We need to find the right balance in regulation.
Read the full interview in El Economista.
