One of the current concerns of investors is to what extent inflation is going to be temporary or is it going to become more structural. But the BBVA manager warns that the models that analyze price increases are not tuned to capture the impact of a supply shock.
At BBVA AM they continue to be overweight in risk assets, although Jaime Martínez, global head of asset allocation at the manager, assures that they have reduced their weight in the portfolio, while maintaining hedging because in the current environment “it will not be so easy to get good returns “. He considers that the stock markets may maintain the upward trend during the coming months, although doubts about the persistence of inflation are one of the main sources of concern, especially because the analysis models do not capture the supply shock well. Interview with Jaime Martínez in May.
What do you expect from the companies’ presentation of results?
We look forward to good news. The growths in 2021 are going to be enormous because the comparison with last year is tremendous. For next year we will return to more reasonable or normal levels of 9% -10%, which is where the consensus is for earnings growth. It is important to see what some companies say about bottlenecks in supply chains, how it is affecting them, because it is something that worries investors, the impacts it may have on inflation. It is something that we will look at with interest, more than the numbers themselves, which, in general, will be good.
What do you think they will comment on about those bottlenecks ?
The important thing is to see if they are more transitory or if they lengthen over time and become something more structural. Each sector will have its peculiarities. What would worry me is the general idea that these problems will persist longer.
How do you think they will pick up the impact of energy prices and inflation?
It is clear that in some cases it is a significant part of the cost and it will hurt their margins somewhat. The problem is, above all, at the level of unmet demand. If you are a car producer and you have stopped producing because you did not have any of the necessary inputs, the question is whether that demand has been lost or has accumulated. I believe that in some cases it is lost because it goes to other complementary products, for example, used cars. There will be an impact on this, but the magnitude depends on each sector and each company. I dare not make a general forecast.
How are the portfolios positioning towards the end of the year?
The positioning continues to be favorable for risk assets, although we have reduced it somewhat. We have a more defensive position in emerging markets and that bet has paid off because the noise has come mainly from China. We took some hedges to protect ourselves from a fall that we perceived could occur, as it happened in September. But the environment, in general, is favorable to risk assets. After a full year of almost uninterruptedly rising markets, we are aware that we have passed the maximum of expansionary monetary policy.
All this raises doubts about when the central banks, especially the Fed, will act.. And all this coupled with whether inflation is going to get out of hand or not creates a more volatile environment. You have to be aware of this situation because it gives the feeling that it will not be so easy to obtain good returns. It is going to have to go through episodes of volatility like the one in September and that, in our case, translates into having a little less risk in the portfolios, because the environment is not as clear as in the first half of the year.
Do you keep those coverage for the end of the year? Do you see it possible for stocks to end the year above current levels?
We maintain those coverages. I don’t dare say anything on December 31st because it’s like throwing a dart to see if I’m right. What I am saying is that we are overweight, we are hoping that, with doubts, the market will continue in the right direction. As we have doubts, we maintain these coverage. If I had to say something, it would be that the market is going to be around these levels in a couple of months. In the longer term we think it still makes sense to be on the stock market, so the answer would be higher than it is today. But we are already talking about months.
Has the inflation peak already been seen ?
One of the great fears for the markets is to what extent what the consensus thinks, a temporary rise in inflation, is not so. And at the moment it is getting a little longer than we thought. Inflation models do not capture a supply shock. The inflation models say that inflation is not going to rise much because the economy is still below its potential, which does not generate that wage tension so that inflation is generated in the long term … The problem is that the models They are not tuned for something that has not happened for many, many years: that there is a supply shock. And that supply shock is not well captured by the models, and that is the dangerous point when comparing what is going to happen with the estimates.
Are you more concerned now that this ‘shock’ may occur?
Yes. We started to worry before summer. I think that the big question that has happened these months is that the market in general, or the consensus, has seen that danger more closely and that has been noticed in the prices of assets. It has been noticed that the bond yields have risen, in a clear way, raw materials have risen a lot, in the month of September we have had a strong rise in the energy sector on the stock market … In short, the market suddenly you have assigned a higher probability to that scenario, that’s how it is.
How far can the bond yields go?
We do not see a very strong rise in tires. They can go up a bit more, up to 2% in the case of the US 10-year bond. Our main scenario is that central banks are going to keep control of the situation and it is not going to get out of hand.
China
I mentioned earlier that they have reduced exposure to emerging fixed income, but it was almost the only thing that was giving good returns. Where do they see opportunities then?
Few places right now. In the case of emerging fixed income, there is a paradox: from a strategic point of view, it is one of the few assets in which we see attractive because it offers high spreads for the risk you are assuming, compared to what happens in bonds of developed governments or what happens even with low-risk corporate bonds.
But we have tactically decided to cut exposure to emerging fixed income in summer because we saw that there could be a rise in tires due to the more inflationary environment that we have right now and due to the deterioration that we are seeing in the perception of risk in emerging markets. We maintain that, tactically we continue with little exposure to emerging markets, but it would be the asset that we would like the most as soon as this environment disappears, which is not favorable at the moment.
It can be translated into that it is necessary to take advantage of the moment in which some doubts are dispelled to load the portfolio of this type of assets, which in the long term will do well.
Do you think that China can generate more concern than it now seems to be, with the issue of real estate and its slower growth? Is the market focusing it well?
Yes, I think the market has clearly priced China risk this summer. It is clear that it will grow less in the coming years than it has historically. It is no longer going to be the source of super growth that it was in the last decade. That is not bad in itself, but it does introduce a doubt about that source of global demand, which is going to be less than it had been previously. And then this is combined with a real estate market that seems to have some excesses, and that have been manifested in the case of Evergrande and some other companies.
There I see that it is a short-term risk, but it does not worry me structurally because we start from the premise that this risk will be well managed by the Chinese government. There will be a real estate slowdown but I don’t see that that, to this day, is going to affect globally. Yes, that translates into less attractiveness for the Chinese stock market, but on the other hand, for the Chinese fixed income it is not bad. And it is an asset in which we have invested for the first time this year. It has a great advantage, which is an interest rate curve different from the euro zone, different from the American one and you diversify in a relatively stable currency. I would advise that you keep that in your portfolios, but on a strategic basis.
What other fixed income assets are giving you joy this year?
This year, for the first time in a long time, you know that fixed income as a whole is subtracting, government bonds in particular. Credit is stable in terms of spread, but has been dragged down by interest rates that have risen moderately. The high yield is positive but by the hair. And in general the set of fixed income assets is subtracting. There is a small niche, like China, that is adding a lot.
But in general I would say that there is little place to hide today. It is the least attractive asset. Until the tires clearly rise, I think that will continue, or until the inflationary fear scenario clears.
So how are they protecting those more conservative wallets?
What we have done during the year and we maintain it is to have little exposure to interest rates, little exposure to fixed income. We have low durations, we have diversified and at the stock market level we have maintained an aggressive profile. In other words, for these conservative portfolios, let’s say the bet has been to remove fixed income and overweight equities. It’s a play that has gone well so far. We are practically at stock market highs.
For the next few months it will be more doubtful that the stock market will do as well as it has, so I think the challenge for the conservative profile is that we be flexible, that we have a portfolio that is capable of hitting these movements that they have assets on more tactical horizons. And that, let’s say, somehow we save ourselves when there is a correction and that we benefit when there is a rise … We have exposure to the dollar, for example, that has added up and then we have a part of the conservative portfolios with exposure to strategies absolute return, that this year is adding a lot to us. Non-directional strategies, which do not depend on the stock market or bonds rising.
The scenario for conservative portfolios is complex because a significant part of their wealth is in assets that we do not like today. We will have to manage it almost quarter to quarter.
And in the variable income part, what is its positioning? Before summer they preferred Europe to the US, is this still the case?
That has worked out well. Being underweight in emerging markets we keep it. We continue to think that developed countries have more potential in the short term. It is true that there has been a small advantage, with a tactical horizon, for the European stock market due to its sectoral composition. Because this increasingly probable side scenario, with slightly rising rates and inflation generating concern, what it does is that interest rates move and that favors value sectors, such as energy or financials, and hurts in relative terms the sectors that have risen the most in recent years, such as technology, consumption … And those two are precisely less represented in Europe, and in Spain by extension, which would be an even clearer case.
And while that feeling lasts that we can go to the scenario of high inflation or reflation, I think Europe can do better. Within Europe, it is true that the Spanish stock market is not very relevant in our portfolios, but it seems that it has a greater appeal if this scenario is fulfilled. Also in terms of valuation, with that five-year vision, the Spanish stock market does well.
And on the American stock market, how are they positioned?
At the sector level, we do not have a clear bet in the US, we do not opt for a sector or a specific company. We do see a favorable environment for the value style. And one less favorable than the one we have had in recent years for style growth. But we are talking about very short-term movements, weeks or months, and it will depend a lot on how the interest rate curve moves.
Interest rates in Europe
What is your scenario regarding interest rates in Europe?
Our model tells us that Europe is not going to raise rates for a long time. and that’s what the ECB says. Talking about whether it will be in 3 or 4 years is too risky. But let’s say that you do not have a need to raise rates for a long time right now, unlike the United States, which is already anticipating that the rate hike will be at the end of 2022 or early 2023. For Europe we do not have a date, it is too far on the horizon. I don’t know if the ECB is capable of holding out for four years without raising rates when the rest of the world is raising them. It would be a bad sign for the euro zone if that happened, but it is what the models give us today.
And how does this affect European banks, because it is true that they are benefiting from the cycle but can they survive another four years with low rates?
It is clear that negative rates hurt financial sector accounts, because they bear the negative cost of current accounts, but historically the financial sector does well when the interest rate curve steepens, and that is just what it is. happening: the short-term rate is anchored, but the markets are beginning to discount that it will not be next year or two, but that it will change in the long term.
The ten-year-old types do realize that there will be increases. That slope of the curve is already positive, and you can apply it already in the margins of loans that have a long-term maturity. The light is seen at the end of the tunnel of structurally negative types that we are in.
How do you see Japan, that some firms resemble Europe for this value component?
We don’t have a bet, we are neutral. At the strategic level we don’t like it, it doesn’t have a specific appeal. And on a tactical level, we don’t see a clear reason to overweight it either. It is true that it benefits from a pro value scenario, but we prefer to play it elsewhere, in Europe, Spain, or at the sector level, even in those sectors that benefit from the rise in interest rates.
Within this reduction in emerging markets, are there some markets that concern you more than others, in which it is more evident that you have reduced the weight?
Yes, Asia is more underweight than Latin America. In relative terms, Latin America is better than Asia. We do not bet by country except China.
Crypto assets
In crypto assets they maintain their vision, after what has happened in El Salvador?
It is a breakthrough for the development of crypto assets. For us it is not an invertible asset, so we do not have a position, nor do we plan to have it. Many things still need to be clarified from a regulatory point of view. Today it is a more theoretical than practical debate. What is being seen, regardless of whether it makes sense to buy bitcoins or not, is that the crypto asset ecosystem is developing at a very high speed. And from the point of view that this generates, it is difficult to be on the sidelines. We will have to analyze it in more detail when it is better regulated. For us it is a more conceptual discussion than a practical one.
He mentioned that there is going to be more volatility in the market, conservative investors have little to scratch. What returns can a risky investor expect who may not have been used to market volatility? Should you lower your expectations?
In the long term, the expected returns are going to be lower in many assets than we have had recently because in the world of fixed income there is more risk that rates will go up than down. On a short-term horizon, we think that we must continue to be at risk. For both a conservative and aggressive investor, they have almost no choice but to remain invested in risky assets. It will not be as easy as in the last ten months but it is the place to be. But you have to be more alive because we are going to have more episodes of volatility, you have to be more dynamic, flexible.
How are they positioned in commodities?
It is one of those assets that you have to have in inflationary environments. And on a strategic level we also like it. It is one of the novelties of this year, investment in raw materials had practically disappeared and this year it has once again had a hole in the portfolios.
What raw materials in particular?
By regulation, we have to invest in a diversified index. And we have exposure to commodity indices in general, which have everything. Those that are most protective of inflation are oil, energy, copper, nickel, zinc, industrial metals. We don’t see the best scenario for gold, but we have it too.
Ron Wills is Based in Cape Town and loves playing football from the young age, He has covered All the news sections in WideWorldMag and have been the best editor, He wrote his first NHL story in the 2013 and covered his first playoff series, As a Journalist in WideWorldMag Ron has over 8 years of Experience.