InFocus: Global Macro 2.0

The current view on interest rates: what it means for income investors

The current view on interest rates: what it means for income investors

Tyler Mordy, President and CIO of Forstrong Global Asset Management, tells WP what he likes about Fed Chairman Jerome Powell and how investment strategy is being shaped by macro thematic shifts.

Most economic forecasters currently share the same positive view about the state of the global economy. After a prolonged period of post-crisis gloom and despite ongoing US protectionism, growth is viewed as increasingly strong, synchronous and sustainable. It’s also the view of Federal Reserve Chairman Jerome Powell, the first non-economist in nearly 40 years to take the role.

Coming from a non-economist background, Powell ticks many of the boxes of a modern central banker: cautious, pragmatic and optimistic. Mordy likes Powell’s communication style, describing him as “more transparent than the guarded, consensus-driven Janet Yellen”. He also “generally agrees” with Powell’s positive outlook.

“Economic growth is solid and the global economy has sustainable momentum,” Mordy says.  “What’s more, inflation, a force virtually unseen in the post-crisis world, is starting to reappear in a meaningful way — as it normally does in booming economies.”

In such an environment, it would be fair to expect equities to perform well and fixed income not so well.  However, Mordy believes the US bond market has likely run ahead of itself and that large and steady spikes in yields, even if they generally drift higher over the coming years, are not likely to be sustained in coming months.

“Lifting deflationary forces and, more importantly, the perceptions of continuing ‘low-flation’ will take time to change,” Mordy says. “The popularity of so-called ‘secular stagnation’ theories has mistakenly convinced many, including policymakers, that higher inflation is not possible. Central banks are committed to staying ‘behind the curve’ until inflation and growth trends are well-advanced. What’s more, regulatory requirements for banks and pension funds ensure continuing demand for government bonds at any price.”

Given all of the indicators, Mordy expects to remain generally underweight and bearish on Western bond markets in the coming years, although he does not rule out making a move on a tactical opportunity.

Mordy keeps a close eye on the results of the quarterly BAML Global Fund Manager Survey. Results in 2018 have shown a bullish posture toward US stocks and the economy, while US bond pessimism has hit a new record.

“According to recent reports, fund managers are avoiding bonds to the largest degree in the history of the survey, having their largest underweight ever,” Mordy says.  “Additionally, a bond crash is what worries fund managers the most. When such uniform consensus views surface it is time to pay attention and look for alternative scenarios.”

“A better strategy to capitalize on a moderation in yields is to look for income-oriented and other assets that have been heavily sold off during this year’s bond market rout. These stand to gain the most should our view be correct. One such asset is emerging market debt which, in many cases, has also been indiscriminately sold off due to the market’s obsession with trade wars. This presents a large opportunity and we have added exposure to our Special Opportunities strategy to benefit from the above dynamic.”

 

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Founded in 2001, Forstrong Global Asset Management Inc. manages money on behalf of individuals, financial professionals and institutions. Our multi-asset global macro thematic approach has demonstrated the ability to safely steward client assets through challenging markets and economic environments. Forstrong is part of the Industrial Alliance Insurance and Financial Services Inc. (TSE: IAG) family of wealth management companies, which together serve over $100B in client assets.