Yesterday, with a colleague, I studied what big investment houses write, which are often advisers to the Fed, and somehow understand where the situation is heading. I found the Black Rock report interesting.
Link to the report.
Here’s what caught my attention:
one. More volatility. The Fed will be in a difficult situation in the coming years, when increased inflation (while it is directly well above the target of 2-2.5%) does not make it possible to reduce interest rates to support the economy
Right now, the US market is in a sense glad that increases will become %% slower and generally put on a recession, but if the Fed brings rates to 3-4% in steps of 0.25-0.5%, and the economy does not collapse / inflation remains above 4 %, this will mean a big and new negative for the markets
In such a situation, people will understand that inflation is “sticky”, economic growth is about 0%, and the Fed is holding higher debt rates, which is negative for the prices of all assets – both stocks and bonds. Increased risk premium = required return.
2. More inflation for years to come. Rising wages in China, deglobalization, trade wars and sanctions, structural shortages of metals and energy due to the rapid energy transition are just some of the reasons why inflation will be structurally higher
This means that you need to hold 10-20% more of the portfolio in stocks. As the economy deteriorates, there should be more developed market stocks (there are more stocks with a stable business), and as soon as the Fed changes focus to stimulate the economy, more invest in raw materials and emerging market stocks.
Also, against the backdrop of US-China friction and the growth of the $$ exchange rate against the euro and the yuan, it is logical to bet less on the shares of transnational corporations. Their goods and services become more expensive for non-US residents.
If the exit into recession is slow, then high-yield bonds (#HYG = YTM 7.7%) may be of interest, as there will be few defaults.
3. Bet on green technologies. These are not necessarily solar panels, but also, say, copper quarries for extracting copper for electric vehicle batteries, and manufacturers of these batteries. The bet on new energy and electric vehicles requires a colossal re-equipment of infrastructure
As a result, while prices for raw materials are falling, you can bet on consumers – for example, manufacturers of solar panels have recently shot powerfully. Companies that work with recyclable materials or make biofuels from agricultural products and waste may be of interest
And a little later, you need to bet on the producers of non-ferrous metals and silver
In general, you and I need to understand that stock valuation multiples in the US will be structurally lower, and the growth of the US stock market should not be expected soon. To earn, you need to look for individual names, for example:
– #PYPL and #VISA increase their turnover on inflation
– #COF to benefit from growth in credit card lending to 20%+ yoy
– #NFLX and #DIS for business are more stable than stocks of commodity companies, people will continue to pay them even in a crisis
– Lithium makers for #LTHM type EV batteries could be significantly better off than #XOM oil companies in the economic slowdown
– #META and #PINS are now slowing down in revenue growth as advertising budgets fall as we enter a recession
– As for #AAPL, it is worth studying the issue of their sales in China…
We are now taking these and other considerations into account when formulating our strategy for the US market in the IH analytical subscription, where we try to bet on 50% long/short stocks and 50% purchase ETFs on bonds – this approach will continue until our forecast changes, but for now we expect the S&P to continue declining.
BIG FIRMS BRACE FOR NEW WORLD ORDER