Global Market Trends: Expert Predictions with Massimiliano Bondurri

The recent volatility in currency markets and fluctuating interest rates present both challenges and opportunities that demand expert analysis and strategic foresight. With Federal Reserve initiating an aggressive rate-cutting cycle and the Bank of Japan navigating a complex economic landscape, understanding how these bring financial pressures to the value of US dollar and Japanese Yen is critical.

In this exclusive Q&A with Massimiliano Bondurri, Founder & CEO, SGMC Capital, we find out how to safeguard and enhance your portfolio in this dynamic economic climate. We also discover how investors can capitalise on a dedicated FX investment strategy to generate higher yields during periods with significant macroeconomic shifts and shocks. Lastly, he sheds his perspectives on precious metals as well as the potential for a global debt crisis building up, underscoring the importance of monitoring and analysing market trends for future investment opportunities before making moves.

1. What is the likely forward path for the US Dollar now that the Fed has officially started its rate cutting cycle and signaled it stands ready to do more?

The DXY Dollar Index has seen a strong decline in the third quarter of 2024, losing close to 5% of its value. In the short term the current momentum could see further losses while we remain constructive of the greenback in the longer term, and would thus use any meaningful depreciation as an opportunity to add USD exposure. The recent decline in the Greenback was mostly due to very dovish interest rate expectations by the market, which have been reinforced by the aggressive start of the interest rate cutting cycle by the Fed. In the short term, given the improving risk climate and lower yields across most of the world we see the US Dollar losing some of its safe haven demand status. At these times, investors and traders will likely reduce their holdings of US Treasuries and Dollars and engage in long carry situations / risk-on. We expect the natural beneficiaries of these US Dollar outflows will be high-yielding Emerging Market currencies. In the longer term, on the other hand, we still see the US Dollar as a strong reserve currency and do not see any developments which lead us to believe this situation will change. Any weakness in the Dollar will be cyclical and in line with the pricing in of rate cuts; however, as the interest rate cycle progresses through other economies there will be some buying that comes back in favor of the Dollar. In fact, while the Federal Reserve has started its rate cutting cycle aggressively, we expect other central banks to also be, on balance, more dovish. We continue seeing future growth in the US as relatively more attractive as compared to most other G8 countries, reinforcing our expectations that excessive devaluation will be bought by global investors.

2. We have seen a lot of volatility in the Japanese yen stemming from the recent announcements and actions by the Bank of Japan.

What should global investors focus on and pay attention to understand how the JPY will move in the coming months? Japan is coming out of 2 decades policy of weak and negative rates and along with that broadly and highly accommodative central banking policy that led to active buying of Japanese Government Bonds and Equity ETFs. The rest of the world is now cutting rates and the Bank of Japan finds itself as a lone, if timid, hawk. The market sees the possibility of overnight target rates at around 0.50 % at the end of the coming 12 month period. So, despite hiking rates we expect the Bank of Japan to find itself at the lower end of the range of rates across global central banks. The country also heads into an election at the end of October and that brings with it uncertainty. Policy initiatives, economic as well as other (including defense and industrial) will be closely watched for signs for the trajectory of the economy in 2025 and onwards. Japan continues to build and grow some of the most innovative hardware companies and we expect this strength to only grow over the coming years. While these companies are export oriented we would also like to see domestic focused firms start to deliver strong and organic growth. Population demographics have not been favorable in Japan (and as is in many developed economies) and changing course here is one of the tougher challenges the new government will face. Once the dust settles with the current bout of volatility and if the market is correct in expecting Japan rates to top out at around 50 basis points we would expect selling pressure on the Japanese Yen to build once again.

3. Precious metals have been experiencing a great run so far in 2024. Is this likely to last?

We are seeing metals display a strong directional correlation with other risk assets and with the Federal Reserve on a rate-cutting path we see gold and silver especially finding a strong bid. With respect to gold, a lot of the recent strength can be attributed to strong physical buying by global Central Banks as well as hedging given the current geopolitical tensions. Both factors are likely to remain over the medium term but a lot is already priced in; we therefore do not expect the price per ounce of the precious metal to continue experiencing the same recent strong performance going forward, albeit with an ongoing support. We see the strength of gold and silver as a cyclical rally and are buyers on dips for the current moment.

4. Why should investors have a dedicated FX strategy in place for their portfolios?

We very often see global investors having a tendency to overlook such an important asset class as the FX one in their asset allocations, which can be detrimental in the longer term as the currencies market offers some very attractive characteristics. First of all, it is uncorrelated with equity and credit markets, and it offers excellent potential returns in periods with substantial macroeconomic shifts and shocks, just like the environment we are currently living in, as these moments tend to develop structural changes which will be reflected in large moves within the FX markets. Furthermore, investors need to consider that currencies are the most liquid asset class in the world, hence having a dedicated FX investment strategy focusing solely on this asset class compliments well with global diversified portfolios.

5. Is there still any value left in the fixed income markets after the recent decline in yields driven by the first cuts in most developed Central Banks? If yes, where should global investors look?

Short term interest rates have been declining since the beginning of the year due to increased dovishness by most global Central Banks, but this does not mean that the corporate fixed income space does not offer value anymore, quite the contrary. We particularly like the belly of the curve (4 to 6 years maturities, roughly 3 to 5 years duration) as this part of the curve allows you to lock in attractive yields without taking too much duration nor credit risk. With respect to ratings, we are buyers of the low investment grade / high junk rated paper (BB+ to BBB+ on average), as these profiles tend to offer an attractive risk/reward profile, with relative and absolute yields more attractive than their higher rated peers without having to give up too much in terms of solidity and safety of the issuer.

6. Where can higher risk investors look to try locking in some higher absolute yields?

Global investors with a higher risk appetite can look at subordinated issues in order to lock in higher absolute yields within their fixed income portfolio. By doing so, investors can receive more attractive returns than with senior paper counterparts in exchange of being lower down the hierarchy in case of default. Clearly, though, investors need to be very selective in the issuers and paper they look at. First of all, we would advise to focus on well-established and profitable issuers with “too big to fail” characteristics, meaning that their collapse would pose serious systemic risks to the environment, in order to minimize the potential likelihood of a default. With respect to the actual details of the issues, when looking at callable paper (often the case with subordinated papers), focus on issues with higher coupon reset spreads and step up clauses in order to minimize the risk of non-call, and look at callable periods within the next 3 to 5 years in order to not be overly exposed to duration risk while at the same time capturing a decent return.

7. What are your views on the potential for a global debt crisis, and how might this impact fixed income markets?

We remain very attentive and cautious in continuously analyzing the debt market and trying to assess in advance the likelihood of a potential global debt crisis. This being said, while debt to GDP ratios are deteriorating across many markets and geographies, and clearly some industries are more at risk than others, we currently give a low probability to a full blown global debt crisis, partly because declining interest rates are likely to make the situation more sustainable and growth in some key markets, like the US, is so far remaining resilient.

8. How do you assess the risks associated with geopolitical tensions and conflicts?

Geopolitical tensions unfortunately remain top of mind in the current environment. We follow very closely and with a heavy heart the developments in both the Middle Eastern and the Russia/Ukraine areas. Both conflicts, especially the first one, have unfortunately escalated over recent months, bringing not only terrible human and social repercussions, but also creating an unstable environment from an economic point of view. Undoubtedly, a full blown escalation would have extreme negative consequences for markets, leading to severe losses across most assets and markets, but we do not see this as the base case and remain hopeful that, eventually, a rational outcome will prevail. This being said, we grow increasingly worried and cautious on the situation and have implemented a number of hedges across our portfolios and funds to protect from negative developments.

9. Can you share what the audience can expect to hear from you at Fixed Income & FX APAC and what excites you about this event?

I am personally looking forward to attending the Fixed Income & FX Apac event and enter into stimulating and thought-provoking conversations on both asset classes. In particular, I will be focusing on the likely future path of some G8 currencies going forward and how these trajectories will be impacted by the likely actions of the relevant Central Banks. Within the fixed income space, we will be analyzing in more detail where global investors can find value within the corporate bond space both from a duration and credit perspective as well as a geographical one.

Hear from Massimiliano Bondurri, at Equarius Hotel, Sentosa, Singapore, on 19th November 2024, 9:35AM: Retrospective Outlook: Sticky inflation, global elections, geopolitical instability, and rate cuts - What does the risk vs reward ratio look like for APAC bond & FX investors over the next 12 months and how can you best adapt your fixed income & FX business to stay nimble? Find out more here!