The Federal Reserve has entered ‘chicken and egg’ territory where expectations of Fed action and actual central bank policy efforts are competing to get ahead of one another.
That is according to Fabrizio Quirighetti, chief investment officer and co-head of multi-asset at SYZ Asset Management.
In an investment update, Quirighetti said: ‘It is a chicken and egg situation: the market’s expectation about the US’s monetary policy path makes it quite challenging for the Fed to actually normalise rates without automatically triggering the uncertainty that would in turn require easing back.’
Quirighetti, who runs the OYSTER Absolute Return fund, said a few positive US economic data points, especially on the labour market, wages or inflation, may be enough to engender a re-pricing of assets resulting from a more hawkish Fed.
‘If we are right, it means that September may be an inflexion point to recent market trends: we don’t expect a strong reversal of these trends but just some pause,’ he said.
He said the dollar may stop weakening, rates should grind marginally higher, spreads shouldn’t tighten further, while emerging markets outperformance could be challenged. Based on these themes, Quirighetti has shifted his allocation to take advantage of the Fed’s action.
‘While we are keeping an overall mild preference for risk, we are reallocating our preferences within our asset classes in order to benefit from a last sip at the Fed’s punch bowl,’ he said.
The asset manager had concentrated his team’s risk budget on European equities, especially banks, where he has recommended the use of ETFs or futures. In addition, the team has exposure to ABN Amro.
Meanwhile, Quirighetti and his team are also looking at high yield short duration bonds and emerging market local currency debt, where there is still some upside potential.
‘Local currency debt we like Mexico through a 10-year government bond and India through a recent issue of a four-year top-rated agency bond, such as British Columbia.’
‘Basically, these currencies are relatively cheap in PPP, they have lagged this year, they benefit from favourable structural backdrop - low budget and current account deficit - and they are somewhat less at risk of a Fed tightening.’
‘We are reducing positions in current asymmetrical risk-reward assets, such as US equities, investment grade credit, emerging market hard currency bonds and gold, as these still carry some risks but haven’t any significant upward potential left based on our economic scenario and asset valuation analysis.'