Watch: CPLIX’s Grant on Late-Cycle Global Opportunities
August 14, 2018
In this far-ranging video series, Michael Grant, Calamos Co-CIO, discusses changing economic conditions and investor attitudes that have influenced the growth environment shaping global markets. Grant is Head of Global Long/Short Strategies and Sr. Co-Portfolio Manager of Calamos Phineus Long/Short Fund.
U.S. Economy: Stronger for Longer
Grant discusses the implications of volatility in a world where economic growth in the U.S. “will be stronger for longer, and yet we still don’t face any inflation pressures.”
Late-Cycle is Not End of Cycle
The current U.S. expansion, approaching the 10-year mark, is relatively long-lived. “But if you look beneath the surface,” says Grant, “it looks much more mid-cycle.”
Grant points out that many U.S. households weren’t able to participate in the recovery until late 2016 or early 2017. Currently, there are healthy cash flows across the consumer and corporate sectors, which is not a signal of imminent recession, he explains.
No Demographic Headwind Until Later in 2019
Inflation remains in check—for now—but as the demographics of the workforce change, says Grant, “the demographic headwind for inflation will turn sometime later in 2019.”
Grant anticipates potential wage gains in the workforce as Baby Boomers are replaced by millennials, who tend to change jobs (for higher pay) more frequently. This factor will contribute to rising inflationary pressures, which the markets will have to confront.
The End of Deflation Fear
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The root of rising interest rates, says Grant, has been “the end of deflation fear. Investors no longer see an economic or financial systemic risk on the horizon.”
However, the next stage of higher interest rates “will likely be accompanied by higher pricing pressures, and that has much different implications for the equity market.”
Getting Back to Market-Driven Interest Rates
“Many of the worst fears of the financial crisis have actually been realized,” says Grant, pointing to the slower growth and lower productive capacity of the major economies.
In Grant’s view, “getting the interest rate policy driven by market forces…is very, very positive.” He sees the anticipated higher interest rate environment as a significant advantage for U.S. assets, including equities.
From Quantitative Easing to Quantitative Tightening
Grant cites two primary reasons for the changing market patterns that emerged in 2018. First, he notes that bond investors “grossly mispriced the long-term growth outlook for the major economies,” overstating the risk of deflation.
The “return to normality,” as supported by the transition from quantitative easing to quantitative tightening, will be a slow transition, Grant says. It will set up “a race between robust corporate fundamentals…and higher interest rates.”
The Impact of the Collapse of the Producer Economy
The long-term wave of capital flows into China and other emerging economies since the fall of the Soviet Union created what is known as the producer economy. That wave peaked in 2011-2012, and Grant doesn’t expect it to come back.
As a result, “major corporations are no longer willing to build global supply chains,” he says. “If they want to supply the consumer here in the United States, they will build here. That’s very positive for the U.S.”
Europe’s Challenge: Legacy Capitalism
“Europe is caught in a deflationary structure with poor demographics that can perhaps be simplified as bad governance. Most of the companies that comprise the major equity benchmarks in Europe are what I describe as legacy capitalism,” says Grant.
The composition of European companies is “very value in nature as an investment style,” he adds. “As long as this bull market is led by growth stocks, it’s very, very hard for Europe to compete.”
Sustained Deflationary Pressure Creates Tension
There is reason to be concerned about the sustainability of the European project. Grant believes it has become “overambitious and has lost support,” partly because the countries within the eurozone region are too different.
Without the economic rebalancing that occurs in countries like the U.S., the region is subject to “sustained deflationary pressure that creates political tension.”
The UK Has Options Most of Europe Does Not
Despite the potential turbulence of the Brexit situation, Grant expects that sterling-based assets, including UK equities, will begin to outperform sometime later this year.
The United Kingdom is in a better position than most eurozone countries because “it runs a significant trade deficit with the continent, and it has a significant non-tradable diversified economy,” says Grant. “That's actually very similar to the structure of the U.S. economy today.”
A Rehearsal of the Upheavals to Come
Grant frames his investment outlook in terms of how defensive sectors have reacted to recent pullbacks.
The performance of equities in the first quarter of 2018 may be indicative of future market disruptions as investors “[embrace] the idea that there’s no inflation risk on the horizon,” says Grant.
A Cyclical Bear Market Could Unfold Quickly—But Not Until H1 2019
Passive flows and corporate buybacks have supported the extended bull market. Grant expects both to wane, as the yield curve becomes inverted—which he believes is likely to occur in the first half of 2019.
The Passive Approach Is More Vulnerable Than It’s Ever Been
“The buy-and-hold bull market is dying,” Grant believes, “which implies the advantage is shifting from passive [investing] back to active, and active long/short in particular.”
He also notes that cash “is becoming a credible investment alternative” for the first time in a long time.
Videos recorded 05/30/18.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.