USA: policy and markets

17 September 2013

The US financial industry’s stance can be summed up in two words: cautious optimism, as Michele Gesualdi, Kairos Partners funds of funds manager, noted after a recent trip to New York and Boston, where he met with a number of operators to gather their thoughts and predictions on a few key issues. “Among them,” he explained, “is the Fed’s tapering of QE, which is expected to be light, as the unemployment rate has yet to improve, inflation is low, the real estate industry has slowed despite the period of growth and the economy is ‘only’ growing at 2%. If the tapering were more aggressive, the response on indices would almost certainly be very negative”. This situation is also influenced by the fact that the end of quantitative easing appears to be more political than economic, while markets demand that it be justified by an actual improvement in the economy. “A QE pull-out would then be inevitable in order to make space for more fiscal stimulus measures,” noted Gesualdi.

The future steps that the Fed will take is a key consideration, especially as Ben Bernanke’s succession draws near. Now that Summers has stepped down, Janet Yellen, currently the central bank’s second in command, seems to be the most viable candidate. The only thing left to do is wait for Obama’s decision, as he is always seeks balance on the many fronts to which he is committed.

In the financial industry, the real estate market’s strength and rising interest rates give us a glimpse of interesting prospects: in particular, regional banks seem to be the best positioned to exploit this trend. However, this does not apply to credit, “since funds continue show little interest in investment grade securities, which are overly exposed to interest rate risk, while achievable returns in the high-yield segment with an event-driven approach are around 10%”.

On this basis, Gesualdi believes that in view of 2014, “the recent uncertainty and consolidation could make room for a more substantial appreciation. This will largely depend on whether economic growth is sustainable even without QE and whether European economies and emerging countries stabilize. At the same time, we see some complacency with respect to the implications of quantitative easing coming to an end. Although it is obvious to everyone that the tapering will be gradual and that, in any case, the data will influence this process, the idea that a few months from now we will find ourselves in a context no longer bolstered by this factor and, therefore, one in which markets are no longer receiving the Fed’s direct support, is an aspect to carefully consider, given the impact it has had on markets and psychologically on investors over the past four to five years.” Accordingly, we can realistically expect greater volatility – both upwards and downwards – in the next few quarters, making asset class choices less obvious. “Some have compared it to the changing of the tide, initially imperceptible but soon significant and inexorable: a context that,” concluded Gesualdi, “we believe will make directional management undoubtedly more difficult.”