With soaring inflation and the shadow of a recession hanging over the United States, the Federal Reserve announced a 0.75 percentage point increase in interest rates last week. In light of this, value investment managers in the US, China and Europe share their thoughts:
“The Fed was “a bit late” in tightening the policy, which made inflation out of control in the short term. In addition, inflationary pressures were heightened with the increasing military tensions between Russia and Ukraine, pushing up energy and food prices further. Commodity prices will likely remain high in the second half of this year due to a possible escalation of the war between the two countries, implying that higher inflation will remain. With persistently high inflation and ongoing political risks, the overall economy is expected to fall into a recession.”
“My view as best as possible is to try and filter out the macroeconomic noise. Obviously, there are some genuine problems with inflation which we need to contend with. But as Buffett says, you pay a very high price in the stock market for a cheery consensus. So, I would look at your investments over three or five years to know if you are getting good, long-term value. It doesn’t seem like we’re going into a deep recession, such as in 2007 or 2018. So, assuming we’re not going into that type of recession. High-quality companies certainly can go lower than 10%, 20% and 30% from here; who knows, and it’s impossible to say. But it’s one of those things where if someone takes more of a long-term perspective, it’s very difficult to do that in a market such as this, and when you’re losing all this money every day, people’s emotions get the best of them. So now is the time to think about adding and subtracting from your exposure.”
“The ECB has three different enemies to fight at the same time: 1) the symptom, which is the evolution of spreads. So far, not yet as alarming as in other moments, 2) the real sickness, which is the indebtedness and lack of growth of some European countries. This can be traced back to very origin of the European Union, but particularly to monetary policies carried out since 2010. And 3) inflation itself, which risks amplifying the two above.
“There is no obvious solution. Now, from the comfortable position of looking at the rear view mirror, it seems that the ECB measures devoted to support financial stability in the period 2010-2021 might have been ill advised. But it is equally true that such measures were designed to support the situation temporarily until a deeper solution came from the political arena.
“Although all of the above looks scary, we are still far from a full fledged blow up. The current consensus points to a moderation of inflation in late 2022 and a limit to ECB hikes in the range of 1.5%.”