Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited
There is little priced in the way of another Bank of Japan hike at their upcoming April Monetary Policy Meeting, which makes sense given their comments at the March meeting where they mentioned they would seek to avoid consecutive hikes. However, in the same period the Japanese Yen is just under 6% weaker vs the US Dollar given the Federal Reserve repricing. The Japanese Yen has also breached some key levels that have been seen previously as lines in the sand, so there is a need to provide some support to the currency. Most likely we will see some changes in language suggesting flexibility around future bond buying, revisions higher to inflation forecasts and lower on growth forecasts. Governor Ueda’s forward looking commentary will also be closely watched as it relates to future hikes and balance sheet policy.
Phillip Orlando, Chief Equity Market Strategist at Federated Hermes
There’s a Wall Street chestnut that one surprisingly aberrant data point is a blip, two are a fluke but three in a row start a new trend. The decline in inflation, once thought to be on a glide path to the Federal Reserve’s 2% target last year, has stalled over the past few months and seems to be re-accelerating. Once, the consensus view was that the U.S. economy was heading into recession at the end of 2023. But the labor market has been strong and hard landing forecasts have disappeared. The current debate is whether the economy will have a soft landing or no landing at all. Fed officials, who assured us just last month to expect three interest-rate cuts this year, are now furiously back peddling, with some warning their next policy decision may be to hike rates.
With interest rates rising sharply, the uncertain timing of potential cuts, volatility rising and elevated price/earnings multiples beginning to contract, the first quarter’s nascent revenue and earnings reporting season has taken on outsized importance.
James Cook, Investment Director – Global Emerging Markets at Federated Hermes Limited
Despite the relatively favourable macroeconomic and monetary policy outlooks, emerging equities are volatile, mainly due to China’s economic woes. However, we are optimistic about the future, based on several Latin American economies easing their monetary policy; India, Indonesia and Mexico benefitting from structural economic drivers; a new technology cycle boosting companies in Taiwan and Korea; and China’s economic overhaul improving its prospects.
We continue to prioritise investments in high-quality businesses that have the capacity to grow structurally, maintain low levels of leverage and trade at reasonable valuations. We believe such firms are well placed to outperform in a world that may experience higher-for-longer interest rates, slower growth and more geopolitical uncertainty.
