Mark Azzopardi, Merill SICAV plc Investment Committee chairman and fund manager, discusses potential interest rate cuts, market strategies and the impact of AI on investments in a rapidly shifting global economic landscape
Over the last quarter, we’ve seen the ECB lower interest rates while the Fed looks poised to follow suit in September. What more can we expect on the interest rate front this year?
MA: It’s not just the ECB; the Swiss National Bank, Bank of China and, lately, Bank of England have done the same in response to slowing growth and disinflationary pressures. The Fed decided to hold interest rates steady in its July meeting but has hinted at a potential decrease in September. This reflects the fact that the US economy has been more resilient, forcing the Fed to hold off on cutting rates just yet.
We’re likely to see continued rate cuts in regions struggling with growth and inflation, but the US situation might lead to a “higher for longer” scenario.
The Fed’s strategy could result in rates staying elevated for an extended period before gradually decreasing, reflecting their cautious stance on preventing inflation while ensuring economic stability.
Has market sentiment worsened in the last few months, particularly with sticky inflation and slowing growth in the US?
MA: Inflation remains persistent, a key concern for both policymakers and investors. While the market rallied earlier in the year, there’s growing recognition that this momentum may not be sustainable in the second half.
Macroeconomic indicators suggest we’re approaching a cyclical peak. PMIs and job figures are softening, indicating economic growth is slowing. The initial optimism surrounding rapid economic recovery is tempered by enduring inflationary pressures and geopolitical uncertainties.
The Fed’s cautious stance, despite some indicators of slowing growth, highlights the complexity of the current economic landscape. They are walking a fine line between curbing inflation and avoiding a recession. The challenge lies in balancing the potential benefits of rate cuts against the risks of a prolonged economic slowdown, which could lead to stagflation if not managed properly.
Is AI still driving the US economy, and how is it influencing your strategy?
MA: AI continues to drive the US economy, particularly through large-cap companies like Nvidia and Microsoft at the forefront of AI technology. We’re now seeing AI’s impact extend beyond these tech giants, creating opportunities in sectors like healthcare, automotive and utilities, where AI improves efficiency and drives innovation.
We’ve shifted our focus to capitalise on these emerging opportunities, increasing our positions in smaller companies poised to benefit from broader AI adoption. With anticipated interest rate cuts, these smaller companies are expected to gain more traction, as lower rates can reduce borrowing costs and enhance growth prospects for businesses in early expansion stages. This strategy aligns with our view that the market is pricing in potential rate changes, allowing diversified growth across AI-influenced sectors.
The utilities and real estate sectors are particularly interesting right now
Are there any sectors that you find particularly interesting at the moment, given the current macroeconomic environment?
MA: Yes, the utilities and real estate sectors are particularly interesting right now.
In utilities, ongoing electrification and rising demand for renewable energy are creating significant growth opportunities. As industries and consumers shift towards electric vehicles and AI-driven technologies, the demand for electricity is expected to rise. This benefits utility companies, especially those involved in grid modernisation. Companies like National Grid and Enel are well-positioned to capitalise on these trends.
In real estate, we see potential in listed real estate equities, anticipating they will benefit from expected interest rate cuts. Lower rates can reduce borrowing costs, enhancing real estate investment performance. We are focusing on residential and commercial properties in regions where demand exceeds supply.
How are you positioning the funds in terms of bonds?
MA: In the investment-grade space, we’re extending duration by investing in longer-maturity bonds with higher coupons. This locks in current yields and provides protection against potential yield increases, especially if interest rates decline.
Our strategy also involves selecting bonds with positive convexity, meaning they gain more when rates fall and lose less when rates rise, offering a balanced risk-reward profile.
In the high-yield sector, we are selective, focusing on bonds with high risk-adjusted returns. Given the correlation of high-yield bonds with equity markets, we prioritise opportunities with minimised default risks and justified returns, given current volatility.
With all these changes, how do you see the geopolitical landscape impacting markets, and what are your main strategies for the upcoming quarter?
MA: The geopolitical landscape significantly influences markets, especially with the upcoming US elections. A Trump election could lead to increased inflation and protectionism, benefitting US markets but also introducing additional volatility. Conversely, a more predictable administration might offer stability, which markets generally prefer.
Active management remains key to navigating these uncertainties effectively. This includes capturing market upsides while maintaining low volatility.
We’re also looking to capitalise on opportunities in non-US markets, as they often offer superior valuation and growth prospects compared to US markets.
Given the likelihood of interest rate cuts, our bond strategy remains crucial. We’re positioning ourselves to optimise returns by extending duration in investment-grade bonds and selectively choosing high-yield bonds with favourable risk-adjusted returns. This balanced approach allows us to stay agile and responsive to market shifts while managing risk effectively.
This interview is issued by Jesmond Mizzi Financial Advisors Limited and does not intend to give investment advice and the contents therein should not be construed as such. Mark Azzopardi is a director at Jesmond Mizzi Financial Advisors, the fund Manager of Merill SICAV plc. The company is licensed to conduct investment services by the MFSA, under the Investment Services Act. Merill SICAV plc is incorporated and licenced as an open-ended collective investment scheme, registered in Malta, qualifying as a Maltese UCITS in terms of the UCITS Directive with effect from the 16th of October 2015. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For more information, contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on tel: 2122 4410, or e-mail mark.azzopardi@jesmondmizzi.com.