The geopolitical, economic and financial risks since the outbreak of the war in Ukraine have overflowed the mercury in the thermometers, both in the market and in the think-tanks that are dedicated to the observance of the world order. Sometimes, like the current one, from both spheres of analysis the “perfect storm” is appealed to. Although the threat of an abrupt rupture of globalization, a new war in Europe, the escalation of energy prices, logistical and commercial blockades, the permanent reinvention of value chains since the outbreak of Covid-19 or its immediate collateral damage -a drop in activity without a parachute and a push in inflation to heights unknown in four decades- seem to justify the idea that the newborn business cycle is waiting with resignation for an accident waiting to happen.
In recent times, the sonar of the emergency has come from the investment field, which is usually the first to express catastrophic fears or unleashed euphoria depending on whether the markets in which they place their assets are going through a bear-bear phase, in trend bearish- or bull, -bull or bullish-. Investment companies have taken on a worrying strategy for high-income nations as corporate bond sales have been imposed; above all, from American and European firms.
In the first quarter alone, investor losses in these assets, according to data compiled by Bloomberg Economics, have reached 805 billion. It is the largest historical drop in more than 20 years, after the credit binge of recent years and the rate competition between fund managers, who have substantially lowered their remuneration to the client. Galloping inflation, the free fall of the economy and uncertainty due to the war in Ukraine "are attacking portfolios from all angles", they agree to point out from investment firms.
Bridgewater, founded by one of the reference gurus, Ray Dalio, in 1975, proclaims it to the four winds in the Financial Times. It has put its corporate bond assets up for sale in 2022 in the face of the threat of an economic recession with a much more complex recovery than that of the biennium because, in that case, it will not have the impetus of low interest rates, but rather everything contrary. The increase in the price of money, which could be Fast and Furious to curb runaway prices in North American and European latitudes, "could give the economy the edge," admits Greg Jensen, one of the Chief Information Officer (CIO) of the considered largest hedge fund in the world. planet.
Bridgewater's senior executive stresses that the firm's decision to adopt this measure is due to a pessimistic view of the global economy's trajectory and that the recent weakness in financial markets will not be temporary. “We are in a radically different world” and “we are approaching a landing”, it is not known if more or less abrupt, but certainly not under control. With an inflation -he explains- that long ago should have ceased to be classified as conjunctural.
The mission of the Federal Reserve, like the ECB, to keep inflation at bay below 2% leaves a subliminal reading of great investor concern: the Open Markets Committee will have to “drastically tighten interest rates, which will cause the economy to collapse and, with high probability, will push the weakest companies into suspension of payments”. This is how Jensen reveals the result of his firm's dissection on the release of corporate bonds in a volatile, sensitive market with falling returns.
Bridgewater's warning points to another revealing fact that has damaged the waterline of almost any investment doctrine. Between January and March, the yield curve in the bond market inverted: placements of short-term assets outperformed long-term debt issues; an anomaly that could last throughout the year -they warn in Morgan Stanley-, in reference to the higher profits of two-year Treasury bonds compared to those issued at ten. Analysts also identify this phenomenon as “2s10s curve regression”.
In March, the Fed completed its first rate increase, of 0.25%, from positions close to zero. While the ECB has just announced that it will change its economic policy in July, also with a quarter-point increase, which will put an end to more than ten years of declines in the price of money, in addition to the epitaph for the purchase program of assets and sovereign and corporate debt.
Historically -they explain in Morgan Stanley- the profitability curve "is a sign of imminent recession"; although, “in this case”, and despite the red numbers in the first quarter, it has “more to do with interest rates that are still too close to zero and with a strong and persistent demand for long-term US Treasury bonds than to health problems of an economy” installed at full employment, with sectors such as housing at a boil, and business profits of 35% in 2021.
However, earnings returns to investors in higher-rated US corporate bonds have also suffered; and drastically: in no less than 440,000 million dollars, the largest erosion in three consecutive months since 1980, according to the Bloomberg intelligence unit with data collected until June.
The unknown is complicated, in this context, because "credit restrictions will immediately grip" the investment strategies of companies in the face of "uncertain perspectives on when inflation will peak" in the US and Europe, recognizes Brad Rogoff, Head of Market Research at Barclays. In the midst of a concatenation of “aligned and connected risks”, according to April Larusse, of Insight Investments, which highlights a combined debt of non-financial firms, households and states of more than 300 billion dollars in 2021.
Tim Magnusson, CIO of Garda Capital, postpones the inflation ceiling in the US to October, after touching 9%. His prediction anticipates that prices will jump to 8.8% in August, a rate that will be maintained in September and will drop to 8% the following month: “It is not a panacea, but until prices begin their remission, the sentiment of the market will remain under episodes of high voltage”. That is to say, another long quarter in sight in which the Fed will persevere in its roadmap of half-point hikes to try to consolidate the 8.9 trillion dollar deficit on its balance sheet.
This scenario also seems to convince Chris Iggo, his counterpart at another capital management flagship, AXA Investment Managers, for whom the stage in which the post-Covid cycle has entered will end up bringing declines in corporate profits, although “it is not necessarily economic contraction. Iggo trusts the last quarter of the year to see the first containment of inflation and the recovery of Chinese activity, as well as a relative but uncertain stability in the markets, with the Fed placing rates at 2.6% at the end of the exercise. But until then the uncertainty, far from receding, is becoming more acute. Goldman Sachs and Credit Suisse advise their clients, in official notes, of the convenience of withdrawing stock assets and accepting dividends now.