Miguel Ángel García has more than 33 years of experience in financial markets. He has been managing director of March AM and investment director at Banca March and Deutsche Bank. In his current position as investment director at Diaphanum Valores, he creates investment portfolios with growth companies such as large technology companies, emerging markets such as India, alternative assets – including catastrophe bonds issued by insurers – and currently government and corporate bonds.
Question: How do you interpret last Monday’s stock market declines?
Answer. The market already knows that August is more illiquid because there are fewer traders working and moves are always rushed. On Monday there was a clear sell-off in the stock markets, especially strong in Japan, after weaker-than-expected employment data was released in the US, although we do not see it as something very important. There was exaggeration there after the rate hike decided by the Bank of Japan. There was also a strong appreciation of gold. In short, the fundamental cause was the market discounting that the US economy will not have a soft landing but that there may be a recession.
P. And what do you think?
R. In our opinion, the United States is still experiencing more than reasonable growth and the global economy is not so damaged that a serious change in trend could occur. We do not believe that we are going into recession, but activity is declining and we may find ourselves facing a less smooth landing for the economy.
P. Could these stock market falls have consequences for the Fed’s decisions?
R. These market behaviours, which have impoverished shareholders, will probably force the Fed to make changes and possibly in September the reduction will be 50 basis points instead of 25. If there is no deterioration in profits, which is not our central scenario, and as a result of the valuations – which we continue to believe are generally not expensive, except in the case of large technology companies – our idea is not to change positions. For those clients who have portfolios under construction, we see this more as an opportunity than as a change in trend.
P. What do you expect from business results?
R. In general, the United States is doing better than expected, and so is Europe. So, in the soft landing scenario that we propose, companies will most likely be able to meet forecasts. If we add to that the start of the process of lowering interest rates and valuations that are not excessively demanding, there is no reason to be worried about equities. And when I say not demanding, I mean that if you remove the Magnificent Seven, valuations in both Europe and the United States are below the historical average.
P. So, the Magnificent Seven should not be held in the portfolio because they are overrated?
R. You have to have them, but maybe not all of them. You have to be in technology because that’s where there is really growth. They are operating with very demanding multipliers, but because they have such strong growth potential, having a fairly high percentage of your portfolio in technology makes sense. In the long term, we believe in growth investing at a reasonable price, so we don’t mind owning companies at high prices if they have very good growth.
P. Do you find any other sectors interesting?
R. There is currently a shift towards smaller companies and also towards more cyclical companies, as the market is almost certain that interest rate cuts will occur.
P. How do you structure your equity portfolios?
R. We have the greatest weight in the United States and, furthermore, in a very simple way, which is replicating the S&P index, so we have technology, health and real estate. But another important block is Europe. There are not the fastest growing companies in the world, but the European Stock Exchange has large multinationals that participate in global growth. And, finally, in this search for growth we have emerging markets, with a specific position in India. It is one of the most expensive stock exchanges in the world, but there are very high expectations of improved results.
P. You also have alternative assets. How are they working?
R. This year, gold has been giving us very good results. It has appreciated significantly, supported by the fact that, quoted in dollars, it gives you an additional percentage. And then we have a series of assets that try to completely decouple themselves from the rest of the portfolio, for example, catastrophe bonds. They are little known, but we have had them in our portfolios for four years. If, for example, a hurricane occurs in the Gulf of Mexico, that is when they suffer, and if not, they are giving a very good return. In addition, the market does not affect them at all: neither interest rates, nor business results, etc.
P. In any case, you are currently overweight in fixed income.
R. Yes, both in Government and corporate bonds. We have Government bonds with a certain duration, that is, with sensitivity to interest rate movements. Specifically, we are in peripheral bonds in a high-duration fund, seven years, although if Government bonds continue to fall in profitability we will most likely change it to low-duration funds, also peripheral, because that part will probably fall the most in the medium term, with the reduction in interest rates by central banks. In other words, we have Government bonds after many years in which we did not see any value, but the truth is that we expect much more from corporate bonds.
P. How do they position themselves in corporations?
R. We have a very strong block of conservative, low-duration funds that have little volatility but that, taken together, with the high returns that have been seen in recent months, usually have a return to maturity of 4.5% or 5%. And then, to a lesser extent, we have flexible and corporate bonds of investment grade and high yield. We have this not so much because we are betting on an improvement in credit quality but because they are very attractive from the point of view of their historical profitability.
P. And how is this strategy working in fixed income?
R. Fixed income has been very difficult to manage in the first half of the year, when some people were predicting up to six rate cuts, although we were not. This is supposed to be an asset that is usually calm, but there have been tremendously strong movements. Now it has normalised a bit and if inflation tends to fall, and so do rates, we expect good performance.
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