TOL - 25th Sep, 2023
Stocks have not adjusted to the new normal - and it's giving investors a difficult choice
Prices take time to adjust - and we're still in the adjusting phase, says Alexandre Ventelon of Morgan Stanley Wealth Management.
Everything has a price but prices take time to adjust. After all, monetary policy has long and variable lags on the economy and on markets. Interest rate hikes take time to filter through to valuations across all assets and the more drawn out the cycle, the longer the lag.
And as the below chart shows, every rate hike takes its toll on risk assets like the equity market.
The cost of financing goes up, the cost of debt goes up, and the psychological/sentiment cost of trying to source extra debt in a market that has no interest in debt-laden firms has soared. Just think of all the companies that have tried to raise capital in the last 12 months and how investors have reacted to them.
Hikes also take their time (and toll) on the consumer and on corporate earnings. As Australia inches ever closer to running out of excess savings, corporates must adapt to a customer that will have less cash and need to find a way to live on less.
When he was asked if we are at this tipping point yet, Alexandre Ventelon, Head of Investment Strategy and Research at Morgan Stanley Wealth Management argued that we are still in the weeds of working out what this post-COVID normal actually means for valuations.
"We [are] still riding what's left of the wave of the post-COVID environment with a lot of pent up demand and some excess savings that is being washed through. So we haven't felt really the pain here."
But if the pain is coming and investors know that it's on the way, how should you be preparing your portfolio for the next leg of this cycle? Ventelon says the answer is relative - relative to each individual investor but also a case of the relative opportunity between equities, bonds, and the risk that comes with investing in either/or.
"Clearly, it makes investors rethink their investment from here on in because it means that equities have to deliver a lot from an earnings standpoint to justify the excess risk versus those safer asset classes," he said.
In this snippet from the recent Livewire Live panel entitled "Is the party over or has the music just changed?", we ask Ventelon to share his thoughts on how 5,000+ basis points worth of G20 rate hikes have really changed the landscape for global asset allocation.
In his response, Ventelon takes a deep dive into how portfolios will need to be constructed in the new world - a world where equities are not the only game in town and billions of dollars is going into risk-free money market funds (also known as term deposits).
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
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