Interest rates aren’t being efficient due to low debt levels
The central bankers forum organized by the European Central Bank (ECB) in Sintra (Portugal) was one of the most important events this week, with investors paying keen attention to what the governing bodies had to say about upcoming monetary policy decisions.
Javier de Berenguer, investment manager and fund selector at MAPFRE Gestión Patrimonial, believes that bankers had already repeated the same message in recent months. “Western central banks are going to add little more,” he argues, and believes that it’s more interesting to watch what others might say, such as the Bank of Japan, which perceives inflation and salary increases in a more positive light.
The current underlying inflation rate, both in the United States and Europe, and the difficulty being faced in lowering it, highlights the relative ineffectiveness of the rise in interest rates compared to other times, due to the fact that families and enterprises are not so indebted.
“Interest rates aren’t the key variable. It’s all about liquidity, which remains abundant and is what sustains the financial markets and the real economy,” he argues, and commented that it will be necessary to keep an eye on the moment when central banks begin to reduce their holdings. “If the selloff intensifies, that's when it will start to be noticed and damage the economy,” he points out.
In the coming month, investors will also be pending stress tests for financial institutions. De Berenguer expects no surprise in this regard, given that after the 2008 crisis, regulators acted decisively and tightened banking requirements for capital and liquidity. “The sector is ready for a possible recession, whether hard or soft,” he explains.
The only danger would be for companies that don’t fall under this regulation, such as US regional banks, which have taken greater risks and whose balance sheets aren’t so healthy.
In the market, investors “keep looking at the banks in the same way they did a decade ago,” resulting in “very depressed” pricing for those stocks. For De Berenguer, within the banks' capital structure, the debt asset is the one that has the greatest appeal, as it has an attractive return and is backed by very healthy balance sheets.
Investment strategy in the second half of the year
MAPFRE Gestión Patrimonial’s team’s recommendation remains the same as at the end of 2022, given that the forecasts remain the same and “they have come in only somewhat delayed.” They therefore advise caution in terms of exposure to financial markets as they are in a phase of economic slowdown.
“We prioritize the short sections of the curve because we believe it’s too early to claim victory over inflation,” says De Berenguer.