Panelists

• Josh Snyder – Global Investment Strategist, GQG Partners (GQG)
• Frances Donald – Global Chief Economist and Strategist, John Hancock Investment Management (JHIM)
• Jack Janasiewicz – Lead Portfolio Strategist, Natixis Investment Managers Solutions (NIMS)
• Brian Collins – Chief Investment Officer at HUB Retirement & Private Wealth (moderator)

Fed Policy Decisions and Interest Rates

The discussion started with this topic as it seems to permeate most investment discussions. The general view of the group was the Fed is likely to put through at least one interest rate cut before the end of the year and that the response within the equity and bond markets would likely be muted, as the expectation has largely been priced in. Each panelist shared views on what would be next for the economy and interest rates.

• Donald (JHIM) started with a comment that the Fed may put through potentially three interest rate cuts before year end but the impact to economic growth would be limited. This reflects her view that the Fed needs to do more to move from a restrictive to accommodative policy.
• Janasiewicz (NIMS) commented that when the Fed puts through a rate cut it would signal that the Fed is not “staying too long” which would be a welcome sign as many see this as a risk.
• Snyder (GQG) offered a different view that the focus of investors and economists should be less on the Fed’s monetary policy decisions and more on fiscal policy and its impact on future economic growth.

The general view of the group was the Fed is likely to put through at least one interest rate cut before the end of the year and that the response within the equity and bond markets would likely be muted.

Economic Growth and Elevated Government Debt

Building on the comments about fiscal policy, the discussion shifted to the probability of a recession at this point in the economic cycle. Again, the panelists had similar thoughts but from different perspectives. All agreed the elevated levels of government debt and the higher debt servicing costs will impact economic growth going forward.

• Snyder (GQG) was less concerned with the US Government being able to service its debt in nominal dollars and more focused on the lower level of purchasing power in real dollars, which will weigh on economic activity.
• Donald (JHIM) concurred that the increased debt servicing costs will be an issue though made clear that the US has significant revenues to cover the debt. Her concern is that government spending on growth generating investments will decline while interest payments and entitlement spending increase..

“The big economic question facing everyone right now is whether the rest of the world will catch up to the US or is the US going to catch down to the rest of the world.” – F. Donald, JHIM.

• Janasiewicz (NIMS) offered a different perspective. With higher yields on fixed income holdings, investors have more options within their portfolios to increase their wealth than they saw in the era of near zero interest rates. Investors may be content with their current fixed income returns and will not allocate more to equities and miss future gains. Many investors have not faced this opportunity cost trade-off in two decades.

Equity Markets

The panel turned to the current equity markets, focusing initially on the US. The first half of 2024 saw continued dominance by mega cap tech and consumer related stocks within the S&P 500, raising questions about valuation levels and overlooked market segments. Of note were their comments about small cap equities and their potential going forward.

• Janasiewicz (NIMS) suggested that the nature of small cap stocks may be changing as fewer small companies are publicly traded and if they do become public, they are mid or large cap stocks. Many of the big gains have been already realized while the companies were privately held. This could lead to more interest in accessing private equity investments in order to participate in the early to mid-stages of a company’s growth story.
• Snyder (GQG) concurred that small cap stock investing has been disrupted by private equity. He pointed out that approximately a third of the current small cap companies in the Russell 2000 do not have positive earnings and are considered lower quality. The typical small cap company is impacted more by higher interest rates, limiting their growth potential.
• Janasiewicz (NIMS) also discussed an interesting dynamic among some of the largest cap stocks and how it reflects the current environment. Many large cap companies can self-finance their growth, yet these companies took on debt when rates were cut post Covid. Now with elevated interest rates the companies are earning sizable spreads on their cash balances while continuing to grow.

International Markets

Looking outside of the US, the panelists discussed the relative attractiveness of economies and investment markets around the globe. Again, the group shared similar views but had different perspectives given their roles.

• Donald (JHIM) provided an interesting assessment of the US economy relative to other developed economies. She noted that many other economies went into or flirted with a recession and are now showing signs of an economic recovery, including seeing interest rate cuts by their central banks. In contrast, the US economy has avoided a recession so far and sustained positive growth without a cut in rates. However, the US economy is now showing signs of slowing, raising the question of whether the other economies will catch up to the US or will the US catch down to their lower growth levels. Overseas equity markets soon may become more attractive as a result.
• Janasiewicz (NIMS) saw similar potential attractiveness in non-US equity markets given the improvement in economic growth and the potential for cyclicals to rebound, though he remains bullish on the US on a relative basis given the greater potential for growth across its more diverse economy.

Asset Allocation – Role of Macro

Continuing the global theme, the panelists shifted to talking about asset allocation and the role that macro forecasting may or may not play. The group agreed that macro forecasting can factor into asset allocation decisions, but it presents challenges.

• Snyder (GQG) began by stating that his team spends limited resources on macro forecasting, preferring to focus more on the company when making investment decision. Macro can help investors by highlighting what to avoid rather than what to buy. It is important to be macro aware to avoid risks while being very targeted in identifying attractive investments that are not dependent on a macro theme.

“It is our view that macro does not tell you what to buy but it can a very good tool in terms of telling you what to avoid and that’s why you see us underweight China.” – J. Snyder, GQG.

• Donald (JHIM) agreed that macro forecasting can serve a purpose but its importance in the decisionmaking process will fluctuate over the course of the economic cycle. Incorporating macro can help with gauging conviction but is rarely the catalyst for the investment decision.

Overlooked Investment Opportunities

The panelists shared thoughts on what parts of the investment universe may be overlooked by current investors.

• Snyder (GQG) quickly pointed to India as a market that was long overshadowed by China and is now attracting interest due to its growing and diverse economy. While it may be viewed as a tech focused market, he noted its breadth including strengths in industrials, materials, and staples. Investors still need to be selective in what they own but the opportunities are there.
• Janasiewicz (NIMS) took a different route and suggested looking at the wide spread between value and growth and large and small caps. Most investors are meaningfully underweight smaller cap and valueoriented stocks that trade at discounted valuations. He acknowledged it is a contrarian trade and that conditions will need to shift for these stocks to come into favor.
• Donald (JHIM) was of the view that now may not be the time to take big bets given the market valuations and economic conditions. Being broadly diversified while remaining nimble allows investors to be opportunistic and avoid concentrated risks.

Risks to be Considered

At the end of each Roundtable the panelists are asked to address risks that investors may be overlooking but should consider as they make investment decisions for 2024 and beyond.

• Donald (JHIM) commented that while the risk of a recession may be underpriced, the bigger risk is that the US economy has not operated in an environment of higher for longer interest rates while growth is moderating. Businesses have benefited from lower rates allowing easy debt refinancing, but this may not be the case going forward. She pointed to the challenges this may bring for managements that may have less flexibility to operate.
• Janasiewicz (NIMS) highlighted two risks: a) given the high exposure to big cap technology companies, investors should pay attention to regulators pursuing anti-trust lawsuits that could have significant negative price implications for these stocks if the suits gain traction and b) the risk of the current regional conflicts escalating which may impact the global economy.
• Snyder (GQG) pointed to the risk of inflation returning. Investors expect inflation to fall back to 2% but there are risks within the economy such as supply chain interruptions that could cause inflation to increase and further delay expected rate cuts..

Summary of Panelist Views

The 2024 Mid-Year Roundtable discussion touched on many topics that are inter-linked: the state of the US and global economy, current interest rate levels and the expectation for rate cuts, the relative attractiveness of different equity market segments, and risks to investors at this inflection point in the economic cycle. Not surprisingly, the panelists believe this environment is very conducive to active management, both from a return seeking perspective as well as a way to mitigate risks. A few takeaways from the discussion were:

• The Fed will proceed with at least one rate cut before the end of 2024. However, the impact to equity and bond portfolios may be limited. The more important impact will be the signaling that the Fed is changing direction.
• While US large cap equities have performed well and are likely to continue to do so, there may be opportunities in other market segments such as small cap, value, or non- US countries such as India that investors should consider.
• Despite overall market stability, there are many risks that are on the edge of investors’ radar screens that have the potential to become more prominent. Investors will benefit by being mindful of portfolio exposures and allocations yet remaining nimble when attractive opportunities arise.

A sincere thanks to the panelists and their firms for their contributions to the HUB Retirement & Private Wealth Mid-Year 2024 Roundtable. Their participation is greatly appreciated.