miércoles, 26 de junio de 2019

miércoles, junio 26, 2019
Interest Rates Around the World Are Coming Down. What Investors Need to Know.

By Avi Salzman and Nicholas Jasinski

                                                                                                              llustration by Chris Mihal



Central banks have performed a pirouette so graceful that it’s hard to remember: Just six months ago, it looked as if a decade of ultra-accommodative global monetary policies was ending.

Now, interest rates are coming down en masse. Investors who adjusted their portfolios for a high-rate environment must readjust. That means leaning into growth stocks again, scouring Asia for opportunities, and earning income from investments that won’t succumb to the low-rate trend and will also hold up in a shaky economy.

There are significant risks, too. Juicing growth during a recovery can lead to asset bubbles, and easing now leaves little policy room to respond when an economic crisis demands it.

Global bankers have eased rates in tandem before. What makes this different from periods in past cycles—say, right after the financial crisis—is that there is not much left to cut. This time even negative rates aren’t stopping bankers from considering loosening monetary policy further.

“Additional stimulus will be required” in Europe, Mario Draghi, the president of the European Central Bank, said on Tuesday, making it clear that the bank’s negative 0.4% benchmark interest rate hasn’t done the trick. Australia’s central bank thinks it is “more likely than not that a further easing in monetary policy would be appropriate in the period ahead,” minutes released in the past week showed. Japan’s central bank already offers negative 0.1% rates, but J.P. Morgan says they could fall to minus 0.3% before the end of the year.

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U.S. rates look comparatively steep, given that they are still solidly in positive territory, at 2.25% to 2.5%. But the Federal Reserve declared on Wednesday that it “will act as appropriate to sustain the expansion.” Most traders now see interest rates coming down, starting next month, and market yields are falling fast. The yield on the benchmark Treasury 10-year note slid below 2% on Thursday for the first time since November 2016.

In a slow-growing, but still healthy, economy, low rates are caffeine to investors willing to take on risk. The last time the Fed cut rates with a similar economic backdrop—in 1998—the S&P 500 rose 3.5% in the next month, and 20.9% over the following year, according to Yardeni Research. Growth sectors like tech and consumer discretionary advanced the most then. Today, strategists say they are advising clients to buy growth stocks over value names.

As for bonds, “I’d be moving up in credit quality, because if we do get this global slowdown, you don’t want to be buying credit at what are relatively expensive levels today,” says Brian Rehling, co-head of global fixed-income strategy for the Wells Fargo Investment Institute.

Rehling also thinks longer-term bonds might be worth buying. “Even though rates are very low, they could quite frankly go lower,” he says.

For the risk-averse, investing in this environment is much trickier.

Low rates tend to hurt retirees. “I remember my father back in the 1970s happily talking about his 15% bank CDs, saying he’s going to double his money every seven or eight years,” says financial advisor Ric Edelman. “Now, people come to us saying, ‘I’m trying to generate a certain amount of investment income and I don’t know how.’”

Edelman, whose average client has $600,000, puts their assets in diversified portfolios of stocks and bonds, but he also advises other moves—like refinancing homes and credit card debt.

None of this seemed likely last fall as policy makers around the world appeared poised to tighten rates to control inflation and “normalize” policy to have more room to cut in case an economic downturn forced them to stimulate again. In an interview in Washington on Oct. 3, Fed Chairman Jerome Powell said that interest rates were “a long way from neutral,” implying that there were several rate increases ahead.

Markets shuddered. The MSCI World Indexshed 18% before Christmas, and didn’t recover until after the new year, when Powell said that the U.S. central bank would be “patient” about raising rates again. The word-parsers initially liked the word “patient.”

Over the next few months—as U.S.-China trade talks fell apart and global economies sputtered—traders grew impatient. When the Fed removed the word “patient” from its statement on Wednesday, it was to complete a 180-degree turnaround.

Forget rate increases. It’s cutting time.

The recent developments are a “remarkable U-turn” for central banks, ING’s European economists wrote afterward. “Only time will tell if this unprecedented activism was genuinely ahead of the curve or just sheer panic.”

In the U.S., the economic data make the rate cuts look more like panic. Unemployment is at 3.6%, seemingly fulfilling the Fed’s mandate to promote employment, and consumer spending rose at its highest rate in a decade in March.

But other forces—political and economic—point the other way. Business confidence has declined as the U.S.-China trade war has intensified, and inflation has slowed, raising the specter of deflation ahead.




Some strategists think the Fed is being led by markets, as opposed to the other way around. “Apparently, Trump is not the only policy maker who views the stock market as the most important poll of the success or failure of their policies,” says Ed Yardeni, president and chief investment strategist at Yardeni Research.

That should give investors confidence that the Fed will be there should a global shock cause the market to falter. “As long as [central banks] continue to provide ultra-easy monetary policy, a lot of it will spill over into asset markets,” Yardeni says.

“So stay long,” he advises. “And if they change their mind, let’s all have a hissy fit and a tantrum, as we did at the end of last year and get them back on the right course.”

Others echoed Yardeni’s sentiments.

Jim Paulsen, chief investment strategist at the Leuthold Group, notes that fiscal policy is equally supportive. The U.S. federal budget deficit rose to 4.7% of gross domestic product in May, one percentage point higher than the level a year ago. Late in previous postwar economic expansions, that measure has steadily declined as the economy recovered. Yet governments from the eurozone to Japan continue to run fiscal deficits, adding fuel to the fire.

Paulsen also notes that the decline in the yield on the 10-year Treasury, to 2% from almost 3.3% last fall, has lowered borrowing costs across the U.S. economy. “We’ve got every major policy gun going off at the same time, and you generally only see that when you’ve been in a recession and you’re trying to get out, not when you’ve been in a recovery,” Paulsen says. “And yet that’s what we’ve got, we’ve got a three-gun gooser right now.”

The triumvirate of stimulative ammo has been in place only 14% of the time over the past half-century, according to his data. In those periods, the S&P 500 was higher six months later 80.5% of the time, climbing at an average annualized clip of 17.5%.

On a sector level, Paulsen recommends taking advantage of recent strength to sell such defensive stocks as utilities and move the proceeds to areas that thrive on low rates, like technology and communication services. He also advises a tilt toward emerging markets, which could experience more of an upswing if monetary and fiscal easing is successful at reaccelerating global economic growth.

“The one area where there is more room for inflationary policy is Asia,” says Robert Horrocks, chief investment officer for Matthews Asia. “You look at Singapore, you look at Thailand, these countries are incredibly tight, both in monetary and fiscal policy.” He suggests that investors buy bank stocks in countries like Thailand, Singapore, and India, where monetary policy may loosen.

Central bankers may be projecting pessimism, but the outlook for investors willing to take on some risk isn’t as gloomy.

“I think the biggest thing is to fight the urge to get too bearish,” Paulsen says. “In order to be successful last year, you had to be appropriately cautious in the face of nothing but good news. This year, I think it’s the opposite. You really have to stay appropriately bullish in the face of nothing but bad news.”

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