Keeping an open mind on interest rates

US inflation is proving stickier than expected. We believe this trend could continue – and with the economy also remaining relatively resilient, investors need to be open-minded to the prospect that rates will remain higher for longer.

While US inflation is on a downward trend, upward pressures on rental costs, a key component of core inflation, could prevent inflation falling below 3% by the middle of the year. A lack of supply of new housing is driving rental costs higher by 6% plus, feeding into core inflation which hit 3.8% on an annual basis in February, down slightly from the 3.9% rate recorded in January.

That background raises the concern that if the Federal Reserve (the Fed) cuts rates too early, inflation could gain fresh impetus, given the persistent strength of the US economy. Mindful of that risk, the Federal Reserve (the Fed) could disappoint investors by easing monetary policy more slowly than expected.

In the last month, the consensus outlook has shifted from 140 basis points of rate cuts in 2024 to closer to 80bp. So, in our view, investors need to be open-minded to rates remaining higher for longer.

That prospect raises a second concern: while the US economy has remained resilient, the threat of tighter monetary policy may not have passed. The US economy could still experience a downdraft in economic activity.

Despite this environment, opportunities still exist at the stock level. While our portfolio remains relatively defensive, we can’t ignore that a weak global industrial production cycle has weighed on global cyclicals. We’ve selectively added to global cyclicals with attractive long-term supply and demand dynamics that are showing bottom of the cycle characteristics such as inventory destocking, low levels of inventory and weak pricing, and are priced on low multiples.

If it becomes more apparent from the data that the Federal Reserve can achieve a soft economic landing (where inflation cools and interest rates fall while a recession is avoided), we’ll further increase our exposure to mature cyclicals or cyclicals that will benefit from long-term investment trends around energy transition and supply-chain onshoring.

In particular, multinationals listed outside the US but with significant exposure to the American market are an attractively priced way to play the soft-landing. Examples include Saint-Gobain, the French-listed building materials company and Siemens, a German-listed global leader in factory automation, which also sells, amongst other things, energy efficient building, factory and grid control systems to manage power consumption, and will be a beneficiary of the energy transition. 

For more background on the outlook for the US economy and global cyclicals, please read our latest newsletter: Goldilocks: perhaps a fairy-tale, but markets still present opportunities.




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14 March 2024
By Alison Savas By Alison Savas 3 min 3 min