Key takeaways:
- Deglobalisation may be reversing some of the competitive forces that suppressed prices during recent decades, contributing to a shift from secular disinflation towards a more inflationary investment regime.
- A more persistent inflation backdrop may favour pro-inflation assets, shorter-duration bonds, and equities that return more cash to shareholders in the near term.
- An active, globally diversified approach can help investors look beyond established US market leadership and assess opportunities across European, emerging, and other alternative asset classes.
IMPORTANT INFORMATION
Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
Fixed income securities are subject to interest rate, inflation, credit and default risk. As interest rates rise, bond prices usually fall, and vice versa. High-yield bonds, or “junk” bonds, involve a greater risk of default and price volatility. Foreign securities, including sovereign debt, are subject to currency fluctuations, political and economic uncertainty and increased volatility and lower liquidity, all of which are magnified in emerging markets.
Volatility measures risk using the dispersion of returns for a given investment.
Definitions
Active investing: An investment management approach where a fund manager aims to outperform a specific index or benchmark through research, analysis and investment selection.
Benchmark: A standard, usually an index, against which an investment portfolio’s performance can be measured.
Deglobalisation: The decline in international integration, interdependence and trade, characterised by a shift from global supply chains towards regionalisation, protectionism and greater nation-state autonomy.
Disinflation: A slowing in the rate of inflation, where prices continue to rise but at a slower pace.
Dividend: A variable, discretionary payment made by a company to its shareholders.
Duration: A measure of a bond’s or fixed-income portfolio’s sensitivity to changes in interest rates. The longer the duration, the more sensitive its price is to interest-rate movements.
Emerging market: The economy of a developing country that is transitioning towards greater integration within the global economy.
Price-to-earnings (P/E) ratio: A ratio used to value a company’s shares, calculated by dividing its current share price by its earnings per share.
Recession: A sustained decline in economic activity, usually perceived as two consecutive quarters of economic contraction.
Total return: The overall return from an investment over a given period, including income and changes in its value.
A yield curve plots the yields (interest rate) of bonds with equal credit quality but differing maturity dates. Typically bonds with longer maturities have higher yields.
View transcript
Seth Meyer: Welcome to the Janus Henderson Investment Summit here in Rome. I’m delighted to be joined by Richard Bernstein this afternoon, our Global Head of Macro and Customised Investing. You just came off the main stage there here in Rome, maybe deliver to us kind of what your main message was on stage.
Richard Bernstein: Sure. Seth, you know it’s been a great event. Lots of great clients here. Lots of interesting discussion. But a lot of what I tried to emphasise with there are sort of a couple of major changes going on in the global economy and in the global financial markets, and we want to be prepared as investors to take advantage of those changes going on.
And I think the two main ones. Number one, deglobalisation the change in the investment backdrop where globalisation forced competition, competition put downward pressure on prices, that’s now starting to reverse. And we’re seeing secular inflation instead of secular disinflation.
And number two is that we’re probably entering because of that secular change in inflation. We’re probably entering an environment which has the broadest set of investment opportunities in our careers. I know it sounds very bearish to say you think there’s going to be more inflation rather than less, but the range of investment opportunities that people are not taking advantage of right now is huge.
Meyer: Yeah. You spoke at length about the deglobalisation trend, the trend that we’re seeing. You don’t think that to be a short term event? You think this is going to be a multi-year event of what we’re going to see here globally?
Bernstein: Well, certainly Seth, so you know, the war, the Middle Eastern war and the effect on, on energy prices is certainly exacerbating what’s going on. But I think people are focusing too much on that short term, short term effect and not paying enough attention to the secular backdrop. So yes, if if all of a sudden we have peace in the Middle East and oil prices come down, yes, that will alleviate the situation to some degree, but it’s not going to change the secular backdrop.
Meyer: And with that, maybe chat to us about sort of your view on on rates and where we are there.
Bernstein: Yeah. I think that the Fed and other central banks around the world are going to be under a lot of pressure, kind of consistent pressure to keep short term rates up. We don’t think we’re in an environment like in the 90s or the 00s or even the 2010s, where, you know, central banks could rush in and play the cavalry and save the day for everybody, because there was always this secular backdrop of disinflation.
They probably can’t do that anymore. At the long end of the curve, we’re hesitant to go far out on the curve until we see signs of a next recession, whenever that is. That’s certainly not our forecast today, but at some point in the future, you’ll see signs of recession. Then you want to willingly extend duration. But until then, I think it’s going to pay to be shorter duration than benchmark.
Meyer: Great. The other the other topic that you were bringing up on stage was difference in valuations and different equity market dynamics that we’re seeing globally. Maybe talk to especially sort of the European client base that was here in Rome. Obviously very appropriate to those in the room, but maybe highlight some of the takeaways there.
Bernstein: Yeah. I think the most interesting thing about non-U.S. stocks, European stocks, emerging market stocks, however you want to try to divide up the world is that everybody said they’ve been cheap forever in a day, and that’s been true. And they had higher dividend yields, and that’s been true too. But there was never a growth story to go along with it.
And what we tried to emphasise in the presentation this morning was that there’s now a growth story to go along with that. If you look at what we call super growth companies, companies that are forecasted to grow earnings 25% or more over the next five years, 75% of those companies, three quarters of the companies are now outside the United States.
That is such an extraordinary statement and reflects so much opportunity that people don’t actually believe that it’s true. Yeah, it’s so extreme. But I think that’s that represents the opportunity.
Meyer: I’m sure there were some eyebrows raised in the room, even even pessimists who actually even live in Europe. That’s exactly probably questioning that number.
So what would you what would you describe as your big takeaway for investors?
Bernstein: So I think two. One is that the world is changing, right? And let’s not pretend that it’s not changing. We know that the globalisation is taking effect. And I’m not saying that everybody should 100% change their portfolio for this kind of secular inflation backdrop. But the question is, do you have anything that is positioned in the portfolio to take advantage of that?
And for most people, the answer is actually ‘no’, they don’t. So we think people should be looking at some pro inflation assets. And there’s a broad range that would qualify as pro inflation assets.
The second thing that I think people want to think of, if we’re right and we are entering a period of, of secular inflation, is to think short duration – short duration fixed income, short duration equities.
Most people don’t think of equities in terms of duration concept. What is a short duration equity? It’s a low PE high dividend yielding stock right. Just like the difference between a coupon bearing bond and a zero-coupon bond, we want to have stocks that are going to give you some total return up front in that inflationary environment.
Meyer: That’s great. Well thanks, Richard, I really appreciate your insight. And thanks for watching from Rome.
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