Article published in elEconomista on 7 October 2024.
After working at Credit Suisse for 24 years, where she was Chief Investment Officer for EMEA, Nannette Hechler-Fayd’herbe joined Lombard Odier this past January in the same role, as well as becoming Head of Investment Strategy, Sustainability and Research. Here, she outlines her current view of the markets and the macro environment, and draws conclusions on the new reality for central banks, the crucial issue for Europe, and the potential consequences for the Fed of a Trump electoral victory. She also gives her outlook for assets, and defends her current preference for fixed-income over equities.
Politics now has a greater impact than monetary policy alone
The world has changed a lot since the pandemic. Politics now has a greater impact than monetary policy alone. It can be argued that prior to Covid, central banks were the drivers of economic policy because fiscal policy was constrained following the European debt crisis in the eurozone, and there was good reason for that part of economic policy to be smaller and to give way to the central banks. Generally speaking, I believe that politics has come into its own again. Think about the US elections: everything has an impact on inflation and inflation expectations.
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If you take a look at long-term inflation expectations in the US, for example, the 10-year break-even inflation rate is now back to 2.2%. It is crucial that it returns to 2%. It took considerable effort by the central banks to bring it to that level, and now politics is having an impact on inflation expectations. Trump proposes higher tariff barriers in general and that could have an impact, albeit temporary, on price and inflation levels.
Think for a moment about the job market in the United States. Take immigration, for instance. Too few candidates to meet demand results in a tight labour market, and that is liable to put pressure on salaries. That, in turn causes inflation in services, until there is a return to an immigration policy that allows for legal immigration.
By that I mean that politics is going to play a role, and for a time we may see a rise in inflation and the need for central banks to react by curbing it. For example, we do not rule out that the Fed, in a scenario where Donald Trump is in the White House, would be unable to lower interest rates to the target level of 3.5%, the figure they have set based on their forecasts. On the flip side, a victory by Harris would not change the current policy in terms of trade and employment as much. That would allow the Fed to carry out its plan to keep lowering interest rates over the next few months.
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I still believe that there are good reasons for holding some fixed income. Think about interest levels in the eurozone, bond yields and so on. They still offer a return in real terms. There are still real positive returns and, in portfolios, if you want a diversifier, fixed income does have its place. In euro-denominated fixed income, many investment-grade corporate bonds offer a good opportunity.
All in all, the stock market offers much the same level of profitability as investment-grade corporate bonds. Having the same level of profitability means we are equity market neutral
All in all, the stock market offers much the same level of profitability as investment-grade corporate bonds. Having the same level of profitability means we are equity market neutral. Overweighting makes sense in some markets where we are seeing greater value, but that is generally not the case at this time.
It is interesting that China is having a deflationary impact on the rest of the world. This happened a lot during the globalisation process between 2000 and 2016. The deflationary impact was very visible. Most central banks had to fight deflation during that period. Now that we are living in a multipolar world, where globalisation has made way for a new model of international relations and supply chains, this deflationary impact has become more limited.
The Chinese authorities have launched a coordinated stimulus package to support economic growth and financial markets. The new drive by China has enabled the authorities to regain some initiative, leading to a strong reaction by the markets. But the new measures are not going to solve China’s long-term challenges, so we remain cautious. It is true that if China is to be replaced by other producers, this will entail additional costs which could be inflationary. However, for now I believe that China, and the way it is managing its development, will continue to be deflationary, and international policies will determine how much of an impact this deflation will have.
The Draghi plan focusses largely on investment. One of the reasons the United States has overtaken Europe is because it has invested more. The question is: who finances investments of that size?
I think that Europe’s problem is excessive self-regulation. Regulation is one of the differential features in Europe. The tougher you make regulation, even when done with the best of intentions (for the climate, financial stability and so on), if you go too far it will come as no surprise that investment will dwindle. Regulation needs to strike the right balance.
Read the full interview at El Economista.
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