Jean-Louis Nakamura (Vontobel): “I have confidence in the stock market this year because at some point the US will start to slow down. There are already signs” | Financial markets

In monetary policy it is often said that central banks raise rates “until they break something.” And when it is already broken, they begin to descend. According to Jean Louis Nakamura, events such as the regional banking crisis in the US last year challenge this perception and extol the importance of liquidity as a tool of monetary policy, in addition to its…

In monetary policy it is often said that central banks raise rates “until they break something.” And when it is already broken, they begin to descend. According to Jean Louis Nakamura, events such as the regional banking crisis in the US last year challenge this perception and extol the importance of liquidity as a tool of monetary policy, beyond raising or lowering rates. Boutique director belief in stocks (high confidence stocks) from Swiss asset manager Vontobel is confident that the US economy will slow and rates will eventually fall. In conversation with Five daysThe economist analyzes how an inflation crisis could change the fundamentals of monetary policy and how to fish for “high-quality” securities in the troubled waters of the global economy.

A year ago, it was expected that the US economy would slow by 2024, and that the path to lower rates was more than already underway by now. Have you been surprised by the resilience of the United States? How did this influence your model?

It’s true that this surprised us, but we didn’t change our model much either. Our mistake was that we thought that at this level of rates something might break and that this would force the Fed to intervene and quickly revise its monetary policy. We got it right crack, with the crisis of American regional banks and with the fact that the Fed was going to intervene. We got it wrong: he didn’t cut rates, he provided funding to the banks. The result is the same: liquidity in the US increased by more than a trillion dollars, even though the Fed was allegedly shrinking its balance sheet. That is, we have high rates (above the equilibrium), but in terms of liquidity we have much more than in the 2008 crisis. This is a big difference that we underestimated and which is almost more important for the market.

Thus, they assume that high rates will continue for a long time.

My personal theory is that the dream of central bankers is to start a new cycle with rates, of course, lower than now, but higher than in previous cycles. The price to pay is a larger balance sheet and even higher liquidity, but this has its advantages: since rates are not zero, central banks have the ability to lower them if something happens. In addition, it brings profit to the banking system.

And now? How long should I store them?

I’m confident in stocks this year because I think the United States will slow down at some point. The signs are already there: commercial real estate, consumption, a labor market that is creating fewer jobs… Of course, things are changing faster than we think: I know, because I worked on the French national accounts, that no one knows that the recession lasted until until he received the final figures two years later.

My intuition tells me that this will not be serious: we live in a world in which, if there is crack Central banks don’t need to cut rates. And if they cut them, they won’t have to wait for six months for monetary policy to kick in. The markets will take care of this: they will re-price everything to the point where financial conditions improve, credit spreads almost disappear and, eventually, allow crises to be overcome. It’s a little cynical, but that’s the world we live in.

What short-term threats to the economy do you see other than monetary policy?

What markets fear most, and rightly so, is stagflation: a combination of recession and inflation. It’s not impossible because we’ve already experienced it. This can only happen as a result of an initial global shock that limits supply. That is, a new pandemic or a major geopolitical movement: a blockade of Taiwan or a large-scale war in the Middle East, which determines the production and export of oil.

You run a boutique belief in stocks Posted by Vontobel What makes you think a stock is reliable and good quality? Aren’t all investors looking for quality?

Clearly, there are few investors looking for low quality stocks. However, there were also managers who were looking for turnaround stories in companies with poor management histories and which had extremely high value potential because their price was so low. This model has been lost since 2010 as it was closely linked to macroeconomic issues.

However, the difficulty is to define what this quality is: there is no universal definition. It’s a mixture of concepts that have accumulated: these are companies that are not only more profitable than others and more reliable, but above all, have a better chance of continuing to be so. Many companies at some point have moments of high profitability when they can grow above their market. However, a company’s ability to maintain these characteristics over time and withstand changes, whether cyclical, structural or macroeconomic, is much more limited.

Does consistency trump growth?

There is confusion between quality and growth. It is impossible to maintain a high level of growth forever. Once the strong growth stage is successfully overcome, size and liquidity are achieved, allowing for a “war chest.” With its help, and as long as the regulatory framework allows, new, growing companies that may at some point become competitors can be absorbed. This has happened to technology companies in the United States. An example is the case of Open AI (developer of Chat GPT) and Microsoft, even with their ups and downs.

Then size matters.

The company’s share of its core market used to be very important and had a positive connotation. Nowadays this is important, but it has an almost negative connotation because there is always a risk. That’s why I say that a person grows if the regulatory framework allows it. There is a big difference between the US and China in this regard. If we are dealing with an issue that is strategic and sensitive to the Chinese authorities, then by becoming too big, we end up attracting the threat that it will be regulated in a very unfavorable way one way or another. And we’ve seen this in several companies in recent years.

And in what sectors do you find these quality indicators? Judging by its results, it seems that LVMH’s pursuit of luxury may be an example.

LVMH is a good example because it has the ability to abstract itself from economic cycles and impose its own prices. However, due to our structure, we do not focus on luxury. We look for thematic and impact products where we think growth will be higher than others. Cloud computing, for example. We prefer to talk about computers rather than artificial intelligence because it is bigger and covers more things. The world needs to be ready for AI and there is no alternative to cloud computing. Therefore, we believe that the demand for Hardware It will continue to be very strong. We also pay special attention to the energy transition.

And in Spain? He comments that the energy transition is an opportunity and the peninsula is moving towards becoming center important in the renewable energy sector.

In Spain we have several positions, all related to energy and in particular renewable energy. Our criterion is not purely geographical, but normative: the European Union offers an environment closest to Inflation Reduction Act American, although more bureaucratically complex. There is no alternative. It is true that there have been economic factors that have hurt this sector recently, such as high interest rates, and the elections in Europe and America will set the tone.

The sector is going through a digestion phase. How long will this last? We’re not very positive on solar, we’re a little more positive on wind and electric vehicles, depending on how quickly prices improve and demand recovers in Europe, probably not until the end of the year or early next year. But in any case, in general terms, we know that in the long term traditional internal combustion engine cars are doomed and that the sector can only grow in terms of market share and overall production.

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