Marc El-Lazidi, chief investment officer at Jesmond Mizzi Financial Advisors Ltd, shares his insights on the shifting macroeconomic landscape, the enduring strength of the US economy, and why fixed income could be the asset of choice as market uncertainty looms.
Last year you said the US could be the last domino to fall in a global downturn. Where do we stand today?
The US economy has shown remarkable resilience over the past year. In my November 2022 interview, I pointed out that the US remained relatively strong while global economies faltered. That’s still the case today. However, we’ve seen some significant developments in monetary policy, especially with the Federal Reserve’s decision to cut rates by 50 basis points – a “jumbo” cut, if you will.
This has sparked debate. Federal Reserve chair Jerome Powell claims the economy is in good shape and that the cut was data-driven, while critics, like former President Donald Trump, argue the economy is fragile and mismanaged by the current administration. Regardless of the political narrative, what is clear is that these rate cuts are creating ripple effects globally, making the economic outlook more uncertain.
What main trends are we seeing in interest rates globally?
We’re witnessing varied approaches to interest rate management. The Fed made a significant move with its 50-basis-point cut, while other central banks have been more conservative. The UK, for instance, only cut by 25 basis points, showing a more cautious approach. Meanwhile, countries like Sweden and Switzerland have been more aggressive in cutting rates, even in the face of high inflation.
The European Central Bank (ECB) has been more gradual in its approach, with two rate cuts this year, aiming to strike a balance between controlling inflation and supporting growth across the eurozone.
Norway, interestingly, hasn’t moved as much, preferring to remain dovish, while Australia and Japan continue to navigate complex economic pressures. Each central bank is trying to balance inflation with economic growth, and the policy shifts we see today will shape the macro landscape in 2024 and beyond.
You’ve been critical of Germany’s economic prospects recently. Can you expand on why?
Germany’s economic struggles, particularly in the car-making sector, are worrying. Major players like Volkswagen and Mercedes-Benz have fallen behind in the electric vehicle revolution, which is crucial to their future competitiveness. This isn’t just about individual companies; it reflects deeper structural issues in Germany’s economy.
France is also facing political instability, and with both countries historically acting as engines of European growth, their current troubles cast a shadow over the broader eurozone. Investors are right to be cautious here.
Norway is a strong conviction in your portfolio. Why is that?
Norway is an interesting case. Being outside the European Central Bank’s sphere allows Norway to conduct its own independent monetary policy, which is a significant advantage in today’s volatile market. The Norwegian economy has remained robust, with low unemployment and high GDP per capita.
Interest rates are expected to decline, making fixed income more attractive
Furthermore, the Norwegian krone has been weak against the euro for the past two years, which we believe is undervalued. Given the country’s oil reserves and its sovereign wealth fund – the largest in the world – Norway is well-positioned to weather global uncertainties, making it an attractive investment for us.
How do you manage currency risk across your portfolios, particularly with the US dollar and euro?
Currency risk is always a challenge, but we manage it actively. The US dollar remains resilient, so we maintain a hedge against the euro. On the other hand, we let our positions run unhedged for currencies like the Norwegian krone and the Australian dollar because we see significant long-term value in these currencies. We aim to protect the portfolio from short-term volatility while positioning it to capture gains from currencies we believe are undervalued. It’s a dynamic process, but one that’s essential for active management.
What’s your take on China’s recent stimulus measures?
China has faced significant economic headwinds, particularly in the real estate sector. The government’s decision to inject stimulus into the economy was necessary and has had a substantial impact. The Chinese stock market saw an incredible surge, with gains in commodities like copper and luxury goods.
However, this isn’t just about China – it’s part of a global domino effect. When the Federal Reserve cut rates, it forced other central banks, including China’s, to act. We’ll likely see further interventions from the ECB as well, as these actions by the Fed ripple through the global economy.
Fixed income has become a hot topic lately. What’s driving this interest?
Fixed income is emerging as the asset of choice for many investors, particularly in the face of equity market volatility. The stock market, especially in tech sectors like Nvidia, has become increasingly volatile. As a result, investors are looking for safer alternatives, and fixed income offers that stability.
Interest rates are expected to decline, making fixed income more attractive. While we still see value in equities, the conditions are ripe for fixed income to take the spotlight in the coming months, particularly for those looking to reduce their exposure to volatile sectors.
This interview does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a member of the Malta Stock Exchange. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. 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 further information contact Jesmond Mizzi Financial Advisors Ltd of 67, Level 3, South Street, Valletta, on tel. 2122 4410, or e-mail info@jesmondmizzi.com.