Private Debt: A Resilient Asset in a Diversified Market

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Private debt has established itself as a resilient and diversified market, according to the latest report by Union Bancaire Privée (UBP).

“It is said that private debt emerged as an asset class following the global financial crisis. The contraction of bank lending, combined with quantitative easing and zero interest rate policy, created conditions where both borrowers and investors turned to private debt. This perspective of private debt, as a relatively new asset class associated with specific monetary policy conditions, raises questions about the sustainability of private debt and, in particular, how it will remain relevant for borrowers and investors now that interest rates have normalized,” they explain.

In this regard, their response is clear: the entity expects private debt to continue evolving and growing. “This growth will continue as long as there is an insufficient supply of bank financing and non-bank financial intermediaries, such as funds, to channel financing to potential borrowers. In particular, although the period of low interest rates spurred the growth of private debt, its continued growth does not depend on any specific monetary policy. Over the past decade, direct lending and, to a lesser extent, commercial real estate have been the dominant segments within private debt,” they explain in the report.

Additionally, they are convinced that investors will increasingly seek to diversify away from these segments and favor those that offer both resilience and attractive returns. “We believe that real economy sectors, such as residential real estate and asset-backed financing, meet these requirements and will attract investors. Origination will be an important differentiator among asset managers. The real economy is more fragmented than the world of private equity firms or commercial real estate. Originating transactions in the real economy will require origination capabilities through which asset managers will differentiate themselves,” they argue.

Delving into Assets

Interestingly, private debt has existed in various forms for over 4,000 years, thanks to its very nature: it is privately negotiated between the borrower and the lender. “The strength of private debt lies in its diversity of strategies and transactions. Its longevity is due to its flexibility and its ability to reinvent itself for new financing opportunities. The recent growth of private debt is due to the scarcity of bank loans and the evolution of non-bank financial intermediaries. We expect private debt to continue growing, particularly in strategies different from those that have been predominant in the last decade,” notes the UBP report.

In this regard, one of the report’s conclusions is that the increase in demand for private debt among borrowers is driven by a shift in the supply of credit from the banking system. “In the absence of a change in the supply of bank credit, which we believe is unlikely, the demand for private debt will continue to grow,” they insist. This has led to direct lending being the fastest-growing segment, according to Preqin data, followed by distressed debt, real estate debt, and mezzanine debt.

Another notable conclusion of the UBP report is that direct lending has dominated the narrative around private debt since the global financial crisis. “Private equity fund managers have been able to deploy a significant amount of capital for transaction financing, resulting in the origination of borrowers by private equity firms. Increasingly, according to the report, fund managers seek to diversify away from these sponsor-backed loans and towards other sectors, such as asset-backed financing,” they explain.

Furthermore, the report indicates that investors in direct lending funds likely have indirect exposure to the private equity sector. “We have observed recent reports of delays in private equity exits and an increase in loans within portfolio companies to finance private equity dividends and payments to their investors. These reports are likely short-term cyclical, but they serve as a reminder that transaction origination is a determinant of diversification,” they clarify.

The Demand for Private Credit

In UBP’s view, not all investors have the resilience needed to maintain their investment allocations during market downturns. “An allocation to private debt offers diversification relative to public debt markets. Within private debt, there are many opportunities for diversification, and the four major segments offer diversification among themselves and relative to public debt markets. Greater diversification can be found outside of sponsor-backed direct lending and commercial real estate financing. We believe that investors will increasingly be drawn to other strategies,” the report indicates.

Lastly, the report notes that the market’s expectation is that the transition to normalized interest rates is complete and that short-term rates have peaked. This implies that market commentary has shifted to when rates will begin to fall and how quickly they will do so, and, in response, bond markets have already moved. “Credit spreads have fallen significantly, anticipating better times ahead. However, some sectors still need to emerge from the transition and will likely continue to face headwinds. For highly leveraged borrowers, it is not enough that rates have peaked; they need rates to fall. In the commercial real estate sector, it could take several years to overcome the oversupply and financing gap. We believe it makes sense to invest now, entering a period of falling rates. However, we suggest it is better to choose strategies that do not depend on a rapid fall in rates, are less leveraged, and are not expected to face headwinds in the coming years,” they conclude from UBP.

 

BNY Mellon IM Changes its Brand to BNY Investments

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In celebration of the 240th anniversary of the creation of the Bank of New York, the entity has sought to project its innovative spirit through a rebranding. From now on, the commercial brand will be BNY, updating its name and logo, and Mellon IM will become BNY Investments.

According to the firm, to improve familiarity with who they are and what they do, they have updated their logo and simplified their brand to BNY, while the legal name will remain The Bank of New York Mellon Corporation. “The changes to the logo include a more modern, custom font, a simplified structure, and a distinctive teal color scheme for the arrow,” they note.

The new BNY brand and logo will be implemented across the company immediately, with updates continuing over the next 12 months.

“Under our new corporate brand, BNY Mellon Investment Management will also be abbreviated to BNY Investments. This abbreviated name better represents the variety of distribution and advisory services, beyond asset management, that we offer to our clients,” they add.

Finally, they clarify that BNY Mellon Wealth Management has also been abbreviated to BNY Wealth, and Pershing will become BNY Pershing “to maintain a unified visual identity.”

The SEC Initiates the Collection of Diversity Policies for Regulated Entities

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The SEC has begun its biennial collection of diversity self-assessment submissions from regulated entities.

“This initiative provides organizations with the opportunity to closely review their diversity and inclusion policies and practices in search of strengths, opportunities, risks, and vulnerabilities,” says the statement from the regulatory agency.

The SEC uses the data from the submissions to evaluate and report on progress and trends in the diversity-related activities of regulated entities.

“The participation of regulated entities in submitting diversity self-assessments is crucial for a more comprehensive understanding of the diversity practices and policies being implemented, as well as for sharing information on practices and identifying opportunities,” according to Nathaniel H. Benjamin, Director of the Office of Minority and Women Inclusion (OMWI).

Conducting and submitting diversity self-assessments is voluntary and is not part of the SEC’s examination process. SEC-regulated entities can use the Diversity Self-Assessment Tool (DSAT) to conduct a self-assessment.

Alternatively, regulated entities can submit diversity self-assessments in the format of their choice.

The Fed Maintains Rates Despite Inflation

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The FOMC announced Wednesday that it will maintain the target range for the federal funds rate between 5-1/4 and 5-1/2 percent, based on strong U.S. economic activity, despite positive signs in inflation.

“Recent indicators suggest that economic activity has continued to grow at a solid pace. Job gains have remained strong and the unemployment rate has stayed low. Inflation has decreased over the past year but remains elevated,” says the Fed’s statement.

While the Fed Committee was meeting, it was revealed that the consumer price index grew 3.3 percent compared to the same month in 2023, marking the smallest increase since October.

However, the monetary authority insisted that “in recent months, there has been modest progress toward the FOMC’s 2% inflation target.”

The Committee considers that the risks to achieving its employment and inflation goals have moved toward a better balance over the past year. However, economic outlooks remain uncertain, and the Committee remains highly attentive to inflation risks, the statement adds.

In support of its objectives, the FOMC decided to reduce its holdings of Treasury securities and agency debt and mortgage-backed securities.

Additionally, the Committee does not expect it to be appropriate to reduce the target range until there is greater confidence that inflation is moving sustainably toward 2 percent.

Expert Forecasts

Before the Fed’s resolution, experts from various management firms opined on the measures the monetary authority would take towards the end of the year.

For example, Blerina Uruci, Chief U.S. Economist at T. Rowe Price, said she expects the Fed to show only two cuts for 2024.

“This is a very consensual forecast, as most FOMC members, including (Jerome) Powell, want the September meeting to be optional. If the economy continues to hold up and inflation remains stable, the market can discount the price of September as data evolves,” she commented.

However, the expert warned that it is expected to be a very tight decision for many participants, given the resilience of the labor market, and for this reason, she believes the risks tilt in an aggressive direction, meaning there could be only one cut this year.

On the other hand, Charlotte Daughtrey, Equity Investment Specialist at Federated Hermes Limited, stated that U.S. inflation was well received by the market. However, Daughtrey warned that this would not be a strong signal to extrapolate this single data point and “would expect the Fed to continue acting cautiously, with the prospect of limited rate cuts for the remainder of the year.”

From the Olympics to the Taylor Swift Tour: A Summer Full of Growth Opportunities for Major European Brands

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Alan Edington, part of the BNY Mellon Long-Term European Equity Fund team, believes that summer will bring numerous opportunities for European companies. The celebration of the Olympic Games in Paris, various festivals and concerts, and other sporting events beyond the Champions League can drive company growth. “A summer of sports, music, and celebrations—hooray for summer and for Europe’s leading brands,” says Edington.

Starting with the Olympics, Edington notes that, aside from the negative news it will generate (noise, dirt, traffic, etc.), Paris’s preparation to host the Games has been an impressive feat, particularly in terms of infrastructure. “Although it remains to be seen if the Seine’s water will meet the strict safety standards for competition, the fact that swimming in the river is even being considered is, in itself, an achievement, following an unprecedented €1.4 million investment in a project that has set several engineering milestones. Despite the typical European reluctance to celebrate successes, in this case, it seems we can openly talk about a success,” he states.

He explains that, just as Parisians complain, investors often lament that Europe lacks leading companies in key global growth areas. However, Edington believes that “during the Paris Olympics and other events this summer, numerous European brands with global reach and positioning will not only gain great visibility but will also greatly benefit.” While he acknowledges that Europe is unlikely to top the Olympic medal table, the continent can boast of being home to many of the world’s best brands, which will be prominently featured at the Games.

“An example is Adidas, which is not an official sponsor but is well-positioned to maximize the promotional potential of the Olympics. In April, the company launched new sports footwear models for 41 Olympic disciplines. When Bjørn Gulden took over as CEO last year, his plans for Adidas included returning to its roots as a sports brand, so the launch of the Olympic series is closely aligned with this strategy to expand the number of sports it represents and increase its presence in some of the fastest-growing sports worldwide,” says Edington.

The Experience Economy

In his view, events like the Olympic Games are not only an opportunity for consumer brands but also for the leisure sector. It is estimated that sports tourism already accounts for 10% of global tourism spending, and projections identify it as one of the fastest-growing areas in this market. Alongside this leisure segment, Edington sees great potential in another area: music tourism. “Although estimates of the market size vary, the growth forecasts and spending propensity of these tourists leave no doubt. In early May, the musical and media phenomenon Taylor Swift kicked off the European leg of The Eras Tour in Paris. This tour, like many others and countless festivals, attracts thousands of fans who are not only willing to travel but also to spend,” he notes.

He acknowledges that capturing these “superfans” was one of the topics BNY Mellon discussed with Universal Music Group—whose record labels represent Taylor Swift and six of the ten most acclaimed artists on Spotify in 2023—during a meeting in March. “This audience is a strategic priority for the company, which plans to monetize the demand from these superfans through personalized streaming services with priority access to new albums, exclusive content, and limited edition vinyl records, promotional material, and other collectibles,” he states.

When discussing standout companies, Edington points to CTS Eventim, considering it well-positioned to take advantage of the increased demand for concerts and shows. “With over 300 million tickets sold annually through its systems, the company, which holds the top position in Europe in the ticketing and live events segment, and the second globally, reported a 32% EBITDA growth in the last fiscal year, with results published in March. The results also confirm a year-on-year growth of 32% in ticket sales revenue and 19% in live events,” he comments.

In conclusion, Edington highlights that in the letter accompanying Adidas’s annual results, published in March, Bjørn Gulden wrote that 2024 will also be a great year to showcase our brand at the Olympic Games, Paralympics, EURO 24, Champions League, and many other sporting events. “I believe that many people around the world are looking forward to sports celebrations… and this will also support our business,” he concludes.

The Global Population With Significant Wealth Reached Record Levels in 2023

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The number of high net worth individuals (HNWIs) and their wealth reached unprecedented levels in 2023, driven by a recovery in global economic outlooks, according to the latest edition of the Capgemini Research Institute’s World Wealth Report 2024.

The document reveals that the global wealth of HNWIs grew by 4.7% in 2023, reaching $86.8 trillion, and the HNWI population grew by 5.1% to 22.8 million worldwide, despite market instability. “This upward trend offsets the previous year’s decline and puts HNWI trends back on a growth trajectory,” the report explains.

By region, North America recorded the largest recovery in HNWIs worldwide, with a year-on-year growth of 7.2% in wealth and 7.1% in population. According to the report, strong economic resilience, cooling inflationary pressures, and the formidable recovery of the U.S. equity market drove the growth.

This trend continues in most markets for both wealth and population, but to a lesser extent. The report shows that the HNWI segment in Asia-Pacific (4.2% and 4.8%) and Europe (3.9% and 4.0%) experienced more modest growth in wealth and population. Additionally, Latin America and the Middle East recorded moderate HNWI growth, with wealth increases of 2.3% and 2.9%, and population increases of 2.7% and 2.1%, respectively. Finally, Africa was the only region where HNWI wealth (1.0%) and population (0.1%) declined due to falling commodity prices and foreign investment.

The Case of Spain

The report details that in Spain, the number of high net worth individuals (HNWIs) rose from 237,400 in 2022 to 250,600 in 2023, an increase of 5.6%, above the global average of 5.1%, positioning the country at 15th in the ranking of the top 25 countries by HNWI population. Spain also aligns with the global trend of increasing wealth value, with wealth rising by 5.7%, corresponding to $39.2 billion (from $687.2 billion in 2022 to $726.4 billion in 2023).

Finally, the report notes that the main factors driving this widespread increase have been the rise in stock market capitalization, the decline in general inflation, and the surge in housing prices. Thus, all Western European countries have seen their wealth increase, with Italy and France leading (growth of 8.5% and 6.5%, respectively), partly benefiting from a record year for tourism, strong luxury sector data, and a rebound in exports. Countries such as Switzerland (5.6%), Denmark (4.5%), the United Kingdom (2.9%), and Germany (2.2%) are below Spain.

Regarding Spain’s macroeconomic context, the report details that real GDP grew by 2.5% in 2023 after experiencing 5.7% growth in 2022. The positive GDP is mainly explained by the faster-than-expected fading of the energy crisis, as well as the good performance of the Spanish external sector, closely linked to both tourism and non-tourism services. Additionally, in terms of savings, the report explains that national savings as a percentage of GDP slightly increased to 22.4% in 2023, up from 21% in 2022. Nominal private consumption reached $879.4 billion, representing a 9% increase in 2023; and nominal public consumption reached $315.9 billion, constituting a 9% increase in 2023.

Asset Allocation

As HNWI growth prospers, asset allocations are beginning to shift from wealth preservation to growth. Early data from 2024 suggests a normalization of trends regarding cash and equivalents (deposits, money market funds, etc.) to 25% of the total portfolio, a marked contrast to the 34% observed in January 2023. The report indicates that two out of three HNWIs plan to invest more in private equity during 2024 to take advantage of potential future growth opportunities.

Within the entire HNWI segment, ultra-high-net-worth individuals (UHNWIs), who represent about 1% of the total segment but concentrate 34% of the segment’s wealth, prove to be the most lucrative for wealth management entities. It is estimated that over the next two decades, older generations will transfer more than $80 trillion, driving interest in both financial (investment management and tax planning) and non-financial (philanthropy, concierge services, passion investments, and networking opportunities) value-added services, which represent a lucrative opportunity for wealth management companies.

Additionally, the report reveals that 78% of UHNWIs consider value-added services (both financial and non-financial) essential when choosing a wealth management or private banking firm, and more than 77% rely on their wealth management firm to help with their generational wealth transfer needs. As HNWIs seek guidance for wealth management, 65% express concern about the lack of personalized advice tailored to their changing financial situation.

“Clients are demanding more from their wealth managers as challenges have never been greater. There are active measures firms can take to attract and retain clients and offer a personalized and omnichannel experience as wealth transfer occurs and HNWI growth continues. While the traditional way of profiling clients is ubiquitous, the application of behavior-driven finance tools powered by AI, using psychographic data, should be considered. They can offer a competitive edge by understanding individuals’ decision-making to offer greater client intimacy. Creating real-time communication channels will be crucial in managing biases that may trigger sudden and volatile market movements,” explains Nilesh Vaidya, global head of the retail banking and wealth management sector at Capgemini.

Investment Decisions

More than 65% of HNWIs confess that biases influence their investment decisions, especially during significant life events such as marriage, divorce, and retirement. As a result, 79% of HNWIs want guidance from relationship managers (RMs) to help manage these unknown biases. By integrating behavior-driven client finance with artificial intelligence, wealth management firms can assess how clients react to market fluctuations and make data-driven decisions less susceptible to emotional or cognitive biases. The report highlights that AI-based systems can analyze data and detect patterns that may be difficult for humans to recognize, enabling managers to take proactive measures to advise clients.

According to the report, UHNWIs have increased the number of relationships they maintain with a wealth management firm from three in 2020 to seven in 2023. This trend indicates that the sector is struggling to provide the range and quality of services demanded by this segment. Conversely, single-family offices, which serve only one family, have grown by 200% over the past decade. To better serve HNWI and UHNWI segments, wealth management firms must find a balance between competition and collaboration with family offices. One in two UHNWIs (52%) wants to create a family office and seeks advice from their primary wealth management entity to do so.

Adapting Portfolios for Uncertain Times: Natixis Investment Forum

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More than a hundred financial professionals from the Latin America and U.S. Offshore community gathered in Houston, Texas May 15-17, to take part in Natixis Investment Managers’ 2024 Investment Forum. With a central theme of taking on smart risk for a world in flux, attendees learned firsthand from economists, portfolio managers, global macro strategists, research specialists, and a former NASA astronaut guest speaker, strategies for adapting to succeed. Philippe Setbon, CEO Natixis Investment Managers, kicked off the event by highlighting the growing complexity in the asset management industry. This environment he believes will increase demand for a diversified solutions-oriented active manager.

Knowing financial professionals have a lot of factors to contend with, from lingering high inflation and interest rates, to escalating geopolitical tensions, and the Magnificent 7’s market runup, Sophie del Campo, Executive Managing Director, Southern Europe, Latam & U.S. Offshore, Natixis Investment Managers, said providing them with direct access to unique insights, ideas, and solutions is imperative. “We believe it is more critical than ever to take on smart risk – and to rely on in-depth research and portfolio analysis to rationalize every investment decision,” said del Campo.

To support this, investment experts from DNCA, Loomis Sayles, Harris Associates, Mirova, Ossiam, Vaughan Nelson, Thematics, WCM, and Natixis IM Solutions – all part of Natixis’ global asset management network – engaged with attendees on ways to build more resilient, risk-efficient portfolios. Active participation was further promoted via a panel hosted by Natixis Investment Managers Global Head of Client Sustainable Investing Laura Kaliszewski, who interviewed two industry-leading clients on methods for implementing sustainability in their investment process.

How might inflation, rates and growth impact portfolios?

Jack Janasiewicz, Lead Portfolio Strategist and Portfolio Manager with Natixis Investment Managers Solutions – U.S., and Mabrouk Chetouane, Head of Global Market Strategy for Natixis Investment Managers Solutions – International, expect inflation to drift lower, major central banks to commence interest rate cuts, and slower growth. But depending on the region there will be measurable differences.

“As inflation continues to come down in 2024 this will allow the U.S. Federal Reserve to cut rates. Maybe in September or December. And hikes are done,” said Janasiewicz. In Europe, inflation remains sticky, with wage increases, especially in Germany, continuing to feed inflation, according to Chetouane. Energy prices are also inflationary for this region which imports most of its energy. Having already signaled a 25-basis point rate cut in June, Chetouane expects another one in the fall from the ECB. “At the beginning of the year, the market was expecting six rate cuts from the ECB, that is now down to two cuts,” said Chetouane.

They believe Latin America should benefit from U.S. growth. Also, central banks in the region have demonstrated their ability to manage the inflation cycle coming out of the pandemic. The U.S. economy is fairly robust and that should flow over into Mexico and Latin America markets,” said Janasiewicz. Also, U.S. corporate earnings remained healthy for the Q1 earnings season, with the final tally approaching nearly 6% growth for the quarter.

With this backdrop, Janasiewicz favors equities with a tilt to U.S. stocks and market weight International Developed. Large caps and SMID within U.S. equities, especially in quality cyclical value, are attractive to him. Also, he thinks lower rates may lead to down-in-cap participation with SMID playing catch-up later in the year. Chetouane also sees areas of value in Europe and small cap opportunities.

Asset allocation trends: Anything but cash
Cash redeployment is a big theme with investors in 2024, says James Beaumont, Head of Natixis Investment Managers Solutions. His Portfolio Clarity team, which analyzes advisors’ portfolios for asset allocation trends, has tracked a sizeable flow from money markets back into stocks and bonds. “Many investors missed the rally and are looking for opportunities. Fixed income and small caps are two favored areas,” said Beaumont. He added that higher rates and increasing dispersion within asset classes is once again driving opportunities for active managers and alpha generation.

A few actively managed strategies highlighted for adapting portfolios in uncertain markets include:
Flexible fixed income: DNCA Alpha Bonds strategy can take short and long positions on the markets and tends to have low to negative correlation with major fixed income asset classes.
Flexible growth: Loomis Sayles Sakorum Long Short Growth Equity focuses on alpha generation from long-term exposure to high quality businesses with sustainable growth prospects – as well as shorts exposure to generate alpha and provide downside protection.
Global diversification: Loomis Sayles Global Allocation takes an opportunistic, best ideas approach, leveraging  the firms’ renowned global research platform across equity and fixed income markets. Fixed income is used as an alpha driver and not just to provide ballast.

For more insights and ideas, visit Latin America or US Offshore.

Good Management of Advisor Teams Is Crucial for Growth

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In the wealth management industry, the concept of teamwork has become a central component for achieving scale and generating business value for advisory practices, according to new research from Cerulli Associates and Osaic.

The study, titled “Top-Performing Teams: Exploring the Benefits and Approaches of Building a Team-Based Advisory,” found that team-based practices achieve better results in key measures, including assets under management (AUM), services offered, and productivity.

According to Cerulli, nearly half of advisors currently work in a team structure. The trend towards teamwork is even more pronounced among larger advisory practices: 94.5% of practices with over $500 million in managed assets operate in a team-based structure, compared to only 5.5% that operate solo.

Teams benefit from optimized resources, processes, and services, and typically operate with higher levels of productivity compared to individual practices.

The research found that team-based practices have an average of $100 million in AUM per advisor, compared to $72 million among individual practices.

“One of the key benefits of multi-advisor teams is the diversity of skills, experience, and complementary knowledge. Combining the expertise of each team member allows practices to leverage their individual strengths and provide specialized services, including lending, estate planning, and tax services,” says Asher Cheses, director at Cerulli Associates.

Teams serve a broader core market, with an average client size of $1.6 million, compared to $1 million for individual practices.

Advisors seeking to move upmarket or enter a new client segment have succeeded by forming teams to expand their service offerings to include more financial planning and high-net-worth (HNW) services.

“Teams can accelerate their growth by better leveraging platform resources, such as financial planning, advisory, and high-net-worth solutions, as well as business development resources and capital solutions,” says Kristen Kimmell, executive vice president of business development at Osaic.

Fixed Income and Technology: Alternatives to a Strong Economy That Delays Interest Rate Cuts

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From left to right: Tiago Forte Vaz, María Camacho and David Hayon | photo: Funds Society

The Rise of Artificial Intelligence and Central Bank Rates in the U.S. and Europe open opportunities for investments in both technology and Fixed Income, said experts from Pictet and Edmond de Rothschild at an event in Montevideo.

The experts, Tiago Forte Vaz, CFA, Head of Intermediaries at Pictet for Uruguay, Brazil, Portugal, and Argentina, and David Hayon, Head of Sales Latam at Edmond de Rothschild Asset Management, commented on the macroeconomic scenario, agreeing that the U.S. economy is strong, which is delaying interest rate cuts.

“The resilience of the U.S. economy is noteworthy. Even Fed members weren’t this optimistic. There was talk of a recession. Rate cuts were expected, and everyone was wrong,” commented Hayon.

Forte also emphasized that inflation is the most important issue to address and noted, “The year started optimistically, but central banks didn’t adjust until September.” The expert added that this is a significant risk as the Fed “lost credibility and is willing to tolerate a greater slowdown to avoid inflation.”

Hayon, for his part, supplemented the comment by explaining that Europe has more control over inflation but will try to align rate cuts with the U.S. to avoid generating inflation.

Geopolitical Risks

Both experts said that “it is impossible not to talk about geopolitical risks.” It is a latent conflict that could escalate, commented Forte.

However, Hayon tempered this by stating that they do not believe Europe will intervene militarily in the conflict. “We don’t imagine French troops in Ukraine,” said Hayon, adding that it is believed “the conflict will be played out in negotiations to achieve an end to the conflict and avoid escalation.”

Another geopolitical risk is that 70% of the population will have elections this year. Among the most notable countries are the U.S., India, Mexico, and Russia. “This environment creates tension and uncertainty that is difficult to diversify at the portfolio level,” added Forte.

The event, moderated by María Camacho, founding partner and director of strategy at LATAM ConsultUS, also included time for strategy presentations.

Pictet: Artificial Intelligence, Bubble or Opportunity?

Forte began by asking the audience, consisting of financial advisors from the Montevideo industry, whether it is still a good time to invest in Artificial Intelligence (AI).

The regional representative emphasized the concept that technology is overvalued in the present and undervalued in the future. Forte added that it is expected that spending on technology as a percentage of GDP will double.

He also noted that although the world has already been revolutionized by AI technologies, they are still in an early stage. However, “it is growing at an exponential rate.”

Regarding investment challenges, he mentioned the tension over semiconductors between China and Taiwan and “sufficient opportunities” in public markets for these strategies.

Edmond de Rothschild: Fixed Income Still Attractive

From Edmond de Rothschild, Hayon highlighted the importance of fixed income, especially in developed markets.

The expert pointed out that although spreads have narrowed significantly, total returns are good due to high rates and warned, based on the rate context explained, that there is still time to invest in these assets and achieve very good returns.

He also commented on the benefits of subordinated fixed income. Hayon emphasized the possibility of buying hybrid bonds, where the investor buys bonds with the security of investment grade but with the yield of high yield. “Buying subordinated debt from banks and insurers will pay well,” he elaborated.

During the presentation of the EDR SICAV Millesima select 2028 investment strategy, the expert highlighted the high risk of losing reinvestment when in cash.

Today, rates can provide good returns over a year, but fixed income exceeds that return over four years.

When and How: The Great Debate on Interest Rate Cuts in the U.S.

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The latest macroeconomic data confirm the robustness of the U.S. economy, presenting a significant debate for the U.S. Federal Reserve (Fed). From today until Wednesday, the Fed will hold its meeting, according to asset managers, with all the necessary ingredients: updated labor market and inflation data; economic projections; various perspectives within the FOMC; and Jerome Powell’s press conference. What should we pay the most attention to?

According to Erik Weisman, Chief Economist and Portfolio Manager at MFS Investment Management, perhaps the most important thing will be whether the Fed considers the April consumer inflation figures to be low enough to mark the start of a weakening trend. “The Fed has indicated that it needs to see several consecutive months of significantly more controlled inflation before beginning to cut interest rates. It is unclear whether the April data on the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) meet these criteria. This may be clarified during the press conference,” he notes.

Secondly, Weisman adds, “Another interesting point is the long-term dots, which indicate what the Fed considers its nominal neutral policy rate. Last quarter, the long-term median dot increased for the first time in a long time. Most market participants believe that the nominal neutral long-term Federal Reserve funds rate should be considerably higher.”

Cristina Gavín, Head of Fixed Income and Fund Manager at Ibercaja Gestión, believes that over the past few months, the Fed has been moderating its discourse regarding the path of rate cuts. “The most interesting thing, as with the ECB, will not be the announcement of maintaining the intervention rate, but Powell’s subsequent speech, where he will assess the country’s economy and what we can expect for the second half of the year. It is most likely that he will emphasize the need to be patient and wait for more convincing data to begin the rate-cutting process,” Gavín argues.

Main Forecasts

According to DWS, the big debate is about how much and how the Fed will cut rates. “Monetary policy is clearly restrictive from the labor market perspective. However, current inflation metrics do not yet justify a cut. It is no surprise that the Fed sees balanced risks and maintains close vigilance, as well as an open mind about incoming data,” argues Christian Scherrmann, U.S. Economist at DWS. The asset manager believes that in the real world, full of complexity and measurement errors, chaining the Fed to a single policy rule has always seemed like a bad idea. “But arguably the other extreme is even worse: letting elected politicians directly interfere in rate-setting, instead of having an independent central bank publicly committed to a stable framework and accountable for achieving its monetary policy goals,” they state.

“After strong employment data on Friday, expectations regarding rate cuts have cooled, and the market now only prices in one and a half cuts by the end of the year. Since the Fed is not expected to cut rates this week, the summary of economic projections should also reflect that the Committee has reduced its forecast for cuts this year. That is where the focus will be. We believe the dot plot will place the median reference rate closer to 5% by the end of the year, compared to the previous 4.6%. We will also be attentive to the language the FOMC may use to describe its growth and inflation outlooks,” says John Velis, Macro Strategist for the Americas at BNY Mellon IM.

According to Enguerrand Artaz, Fund Manager at La Financière de l’Echiquier (LFDE), market actors’ forecasts for the Fed’s trajectory have rarely been so disparate: some still predict a first cut in July and several more in the coming months, while others do not expect any cuts in 2024. “However, the U.S. is perhaps the country that could offer more visibility soon. Indeed, April inflation data were reassuring after negative surprises in the first quarter; price increases are now only driven by a few components that have little correlation with demand; growth was slightly below forecasts in the first quarter, and the labor market is slowly deteriorating, so the economic outlook, if confirmed, could outline a well-marked path for the Fed,” Artaz notes.

For the Head of Fixed Income and Fund Manager at Ibercaja Gestión, there have been voices that even ruled out cuts for this year. However, her forecast is that “in 2024 we will see a shift in the Fed’s monetary policy bias, with the first cut occurring after the summer. From there, and as long as price developments show a downward trajectory, we would bet on another intervention rate cut by the end of the year, once electoral uncertainty is behind us,” she argues.

Meanwhile, Deborah A. Cunningham, Chief Investment Officer of Global Liquidity at Federated Hermes, notes that despite the warnings at the May meeting, they do not anticipate a rate hike and expect one or two cuts for the remainder of the year. “One thing to note is that the idea of the Fed avoiding rate cuts in September to avoid appearing to interfere with the general elections, foregoing rate action when the data justifies it, could also seem politically motivated,” she explains.

“Canada and the Eurozone have started the cycle of rate cuts in developed markets, following the trend of emerging markets. But it is likely that this week Jerome Powell will confirm that the U.S. will arrive late to the party, as the Fed is not expected to cut rates before September, at the earliest. Global fixed-income investors are already benefiting from rate cuts, while those only exposed to the U.S. will have to keep waiting,” concludes Brendan Murphy, Head of Fixed Income, North America, at Insight (part of BNY Mellon IM).

Data Flows

According to Gilles Moëc, Chief Economist at AXA IM, the market will focus on the new “dot plot” from the FOMC this week. “We expect a change in the median forecasts to two cuts this year, compared to three in March. There is a risk that it will be reduced to just one, but we believe this would eliminate too much optionality, as it would send the message that the Fed cannot cut before the elections,” he explains.

In his opinion, market prices for the Fed changed drastically again last week in response to higher-than-expected job creation data in the U.S. in May, according to the Establishment survey (+272K, compared to a consensus of +180K), accompanied by faster wage increases (+4.1% on a three-month annualized basis, well above April’s 3.0%). Before the publication, two rate cuts were almost fully priced in for December (48 basis points), with 22 basis points already in September. “After the publication, the market was only pricing in 14 basis points of cuts in September and a total of 34 for December. But more than the directionality, it is the confusion that, in our opinion, is the main ‘message’ of the recent data flow from the U.S.,” he nuances.

In this “data fog,” Moëc sees it likely that the Fed’s forecast of its trajectory will be the focal point of this week’s FOMC meeting. “We believe the median of FOMC voters will forecast two cuts in 2024—which happens to be our base case—compared to three in March. Of course, there is a debate around the possibility of maintaining only one cut in the framework, but we believe this would send too harsh a message, indicating that the Fed has given up on cutting before the elections (a solitary cut for 2024 would be interpreted as no easing before December), which we believe would leave the Fed with very little optionality. While time is running out, we still see the possibility that the data flow will clear up enough over the summer to allow the central bank to begin removing some restrictions in September,” he concludes.

In the opinion of Raphael Olszyna-Marzys, International Economist at J. Safra Sarasin Sustainable AM, slower economic growth and a more balanced labor market should reduce inflationary pressures. In his view, the problem is that inflation will take time to return to its target, requiring a gradual approach to monetary policy easing. Nevertheless, given that the labor market has returned to where the Federal Reserve wants it, some Fed members will point to the risk of waiting too long. He believes that the Fed’s new projections could point to two rate cuts this year, but the distribution seems likely to tilt downward.

“The distribution of market participants’ expectations for the federal funds rate at the end of the year will likely shift to the right (a higher official interest rate). While the median ‘dot’ could point to two cuts this year, we believe a greater number of officials will forecast that the official interest rate will only be cut once or not at all this year. Overall, the slower-than-expected progress of inflation could limit the speed and promptness with which the Fed wants to cut rates,” argues Olszyna-Marzys.