stock market strategy | Investment ideas: Commodities and banks are the best places to be when rates rise: Mark Matthews

“We think the US stock market, which has recouped two-thirds of its losses so far this year, will hit a new high. That’s the global benchmark. So if the US market can hit a new high, d ‘other open markets and India is part of it, will follow,’ said Mark Matthews, Investment Research Manager, Julius Baer.

The markets are trying something different, aren’t they? There is a problem in the bond market, yields have reversed but stock markets are saying it is time to move on.
Well, yields briefly reversed Friday last week and Monday this week since then they’ve been more reversed. But you’re right, the bond market is the most important thing to watch right now and the Federal Reserve has indicated a pretty aggressive and anticipated up cycle that started last month and the futures market is telling us that the terminal rate will be around 3% next summer.

But the St. Louis Fed’s James Bullard, who is a well-known hawk, said he would like it to be at maybe 3.5% by the end of this year. The reason I’m telling you this is that right now 10-year Treasuries are at 2.6%, but if we think back to 2018-19, in the last rate hike cycle, the peak federal funds was 2.5%, which is a bit lower. from 3 to 3.5%. This is where it looks like we are going and the 10 year was at a high of 3.2% at the time. I just think if we’re really on track towards 3-3.5% with the fed funds rate, we should be thinking about a 10 year treasury, maybe around 4% or something . I don’t think the market will be comfortable with that.

So why aren’t stock markets nervous? Are stock markets saying it’s time to look beyond 2022 and focus on 2023? Is it the forward-looking nature of the stock market that in a sense doesn’t really add to lot volatility or any form of free fall?
The reason why I like the market so much is precisely because of this. We will look back and understand why they are increasing, but right now I don’t think anyone can tell you with a straight face that they know. I will say that the technical data recently has been strongly indicative of a resumption of the uptrend.

For example, we have recovered two thirds of the loss so far this year and when we look at history we see that most of the time when the markets go up two thirds they go up 100% and eliminate the old top. But I can see many other technical indicators from the peak then the retracement of the volatility index and the early decline oscillators that all indicate that the market is generally up 12 months later after this stuff happens product.

I guess if I had to pick one fundamental reason for market strength, it would be that inflation would come down and the Fed wouldn’t have to raise rates as much as we think. But for now, I don’t see why the inflation rate should go down. So it’s a little weird.

But as an equity investor, what should we do given that at the index level and at many stock and sector levels we are close to the all-time high and then there is concern about this that quarterly profits will generate in terms of a hit of inflation?
I don’t have a good answer because I’m a bit lost myself. What I would simply say is that over time it becomes clear that being invested in the market is better than having cash. So if I had to guess which industries would do better than others, I’d say the so-called long-running stories, the tech stories, the companies that have a lot of great stories but not a lot of profit, aren’t there. place to be in a rising rate environment. The place to be is in commodities. Banks have gotten really battered, but if rates go up, then banks benefit. So, I would have thought Commodities and Banks was the best place to be right now.

Russia is a market where it is not possible to invest at present, China has a unique set of challenges. In Turkey, inflation reached 60%. Will Indian markets be a disproportionate beneficiary of what is happening in the world?
No, I don’t think so because they are lumped into this emerging market asset class. When people read the news about Russia or Turkey or Sri Lanka, they’ll just think I don’t want to be in emerging markets. So, perhaps within the emerging markets asset class, investors who specialize in this area would favor India, but this type of investor would only represent a small minority of the total wealth pool. devoted to actions on a global scale.

In a world where inflation is real and lasting, how do you make Teflon-coated wallets against inflation and protect purchasing power?
The answer is simple. We have commodities and there are countries that are very obviously correlated to commodities in both their currencies and their markets. These are Australia, Canada, South Africa, Indonesia and Malaysia. There are probably a few more that I forgot but these are the main ones. I might have thrown out the UK just because the UK economy is not commodity based. But the stock market, oddly enough, is heavily exposed to commodities. We just bought Canada a few days ago to get this kind of protection and the reason is that the companies are very well run, currency correlates with commodities, also has a good banking sector. I guess the icing on the cake is that I’m Canadian so we decided to put some money in to work there.

You’ve said many times that you want to go where you’re going to get at least 15% earnings growth. As we enter the new financial year in India and ahead of earnings season, are you convinced this is the place to be as you will see earnings growth of over 15%?
We started the year with 18%. Now we’re at 15% and I’m pretty confident that we can sustain a 15% forecast for the next fiscal year because the price of oil won’t go back around 130%. When we look at what’s driving earnings growth in India this year, it’s sectors like IT, banking and the commodities companies themselves. I think 15% is achievable and that’s something that makes India a bit unique because in America for example they will be lucky if they get maybe 6%.

You talked about banks, technology and raw materials. Would the investment strategy for commodities be solely via the equity markets or also on the holding of commodities?
Precious metals are easy to buy through ETFs or funds. The other raw materials are more difficult to buy. I certainly wouldn’t want to touch the futures market. It’s complex and the scrolls make it quite expensive in things like oil. So stocks are a good way to play them in the direction of their producers, then specific to precious metals, we could also access physical bullion in the form of ETFs and I’m very comfortable doing that.

If I can just extend your comment on commodities, interest rates will go up and could stay higher for a long time. What happens to the underlying demand for commodities? If underlying demand for commodities remains weak, don’t you think that underlying prices and commodity-denominated markets could suffer?
I don’t think we’re at that point yet for any of the commodities, where we’re seeing demand destruction. Six months from now it might be different, but I haven’t seen any commodities go down due to anecdotal evidence of less buying and some of them can be very elastic. Oil is generally very elastic, so is food and the main reason they should stay strong is that we have a war that doesn’t look like it will end anytime soon. This exacerbates a lot of supply and energy, for example, as well as food, and these can ripple down the chain in truly remarkable ways.

The other thing I might add on the durable goods side is that Covid is the worst ever in China and I don’t think they can get away from the zero Covid policy and so we might as well get a return to supply chain disruption in durable goods and that would also be inflationary.

It will have an impact on durable goods, electronics, automobiles. Even shower gels in the United States have experienced a supply disruption. Are you overweight in India, but will you stay overweight?
Yes we will and if I can tell you briefly the three reasons why we love it are number one Indian growth has been below average over the last decade for reasons that are no longer with us – the NPAs, the deep structural reforms. So point number one is there’s a lot of catching up in the economy and that’s naturally happening now on the growth that should have happened in the previous decade, but for the reasons I just mentioned, This does not happen.

The second thing is the digital side and this has a very beneficial impact on improving the efficiency of the economy. I wanted to say a third. It’s the demographic dividend and the working age population is overtaking the dependent age population that happened four years ago. This will be the case until 2055 and when I look at history, when other countries enter this kind of golden period of demographics, they have been accompanied by strong stock market performances over the following 10 years.

What would your assessment be? Are we going to eliminate the new all-time high and go further, because what is your assessment on this?
We will do this because everything we talk about is negative, one way or another the market is climbing the wall of worry and as I said earlier it is only in hindsight that we can understand why this is happening. But we think the US stock market, which has recouped two-thirds of its loss so far this year, will hit a new high. It is the world reference. So if the US market can make a new high, other open markets and India are among them, will follow.


Comments are closed.