- Fixed Income Portfolio Manager
Asset classes
Hong Kong (香港), Individual
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain
It is striking to me that a mere seven weeks ago, virtually everyone seemed sure that the financial system was healthy and that most US banks had plenty of capital. Obviously, the March 2023 failures of Silicon Valley Bank (SVB) and Credit Suisse have highlighted the potential risks of such market complacency.
In that vein, I’ve identified what I see right now as three entrenched macro assumptions that could well turn out to be wrong – ideas that, to paraphrase Mark Twain, “the market knows for sure that just ain’t so.”
1. The Fed will have a difficult time controlling US inflation
This widespread belief is a relatively new one. Prior to 2022, most economists would have said that the US Federal Reserve’s (Fed)’s biggest challenge was guarding against disinflation. These days, however, many doubt that the Fed will be able to bring inflation down to its 2% target anytime in the near future.
I agree with the long-term structural arguments for higher inflation resulting from deglobalization, but contrary to most observers, I believe the real problem over the next year could actually be that the Fed misses its inflation target to the downside. Certainly, the Treasury Inflation-Protected Securities (TIPS) market embraces this possibility, with forward-inflation expectations recently below the Fed’s 2% long-term target (as measured by the Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge).
Why the disconnect between market consensus and my own view? Bank lending, which is the most high-powered form of money (and thus most closely related to money velocity), is likely to slow amid today’s tighter credit conditions following the turmoil in the US banking industry (Figure 1). If that proves correct, why wouldn’t we expect inflation to cool and even surprise meaningfully to the downside?
Figure 1
2. US corporate balance sheets are generally strong
Many investors believe the US corporate sector is quite healthy, with strong balance sheets, stable leverage ratios, ample interest coverage, and robust free cash flows. The latest data supports this belief, and many companies did use the low-rate environment of 2020 – 2021 to term out debt. However, much of the available free cash flow can be traced to a lack of capex investment over the past decade, plus companies holding off on further spending until inflation ebbs. Can companies continue to focus on debt-financed share buybacks in lieu of capex in a deglobalizing world of higher rates? Unlikely.
Most investors look at BBB- rated companies with roughly 3x leverage and net-debt-to-enterprise values of 33% and see no reason for concern. However, our research suggests that corporate profits could fall 15% – 25% during the next recession. If multiples were to contract similarly, then your typical BBB- company would start to look more like a BB- risk. For high-yield companies, this math would be even worse.
Normally, companies do not undergo stress from too-high interest payments or because they can’t roll over principal payments; more often, their net debt/enterprise values get so high that they find it easier to restructure the debt. Could ratings downgrades and economy-wide defaults surprise meaningfully to the upside? Perhaps.
3. Buy the US dollar when volatility spikes and stocks sell off
This is something the market has been lulled into believing, as the 15-year US dollar (USD) bull market may have ended in September 2022. The USD has historically tended to move in such long cycles, but often with little correlation to equity performance and market volatility. Past examples of USD underperformance despite financial market weakness include the 1970s, Black Monday (1987), the 1994 Fed hiking cycle, and the bursting of the tech bubble (2000).
Figure 2 shows the performance of developed market (DM) currencies and emerging market (EM) currencies during periods in which the S&P 500 Index suffered a drawdown of 15%+. Prior to the global financial crisis, in most cases, the USD actually underperformed other DM currencies in risk-off environments. EM currencies have a more mixed track record.
Figure 2
The USD has been curiously weak during and since the SVB fiasco. Maybe the pandemic-induced fiscal spending and debt-fueled asset bubbles are starting to catch up to the greenback.
Expert
Related insights
Showing
of
Insights Posts
Trump win likely to accelerate macro trends already in motion
Continue reading
5
min
Article
2025-11-30
URL References
Related Insights
Read next
Showing
of
Insights Posts
Accelerating the future of active management
CEO Jean Hynes explains how Wellington is building for the future of active management by investing in our capabilities and aligning our organization and talent with clients’ shifting needs.
9
min
Article
2025-12-31
Trump win likely to accelerate macro trends already in motion
The US election results could have significant implications for the global economy and markets. To help you understand these changes, US Macro Strategist Mike Medeiros provides a thorough analysis and discusses the potential market impacts.
5
min
Article
2025-11-30
What do the US election results mean for investors?
The US election results could have significant implications for the global economy and capital markets. Our panel of experts provides a thorough analysis of what happened and explores potential market impacts.
Video
2025-11-30
Four investment perspectives amid a pivotal US election
How can investors reposition portfolios for a pivotal but highly unpredictable US elections? Nick Samouilhan explores potential avenues in conversation with three leading portfolio managers.
6
min
Article
2025-09-30
Massive market sell-off: Justified or an overreaction?
What's behind the global market meltdown, and what should investors consider doing? Global Investment and Multi-Asset Strategist Nanette Abuhoff Jacobson shares her views.
3
min
Article
2025-08-31
Unlocking investment value in a 3D world
Co-Head of Multi-Asset Strategy Nick Samouilhan explains why focusing on the “three Ds” of divergence, dispersion and disruption could help to uncover investment opportunities while strengthening portfolio resilience.
5
min
Article
2025-07-31
Exploring active opportunities amid continued regime change
Head of Multi-Asset Strategy, APAC, Nick Samouilhan highlights the importance of focusing on high-quality, well-run companies amid increasing dispersion; diversified regional allocations amid greater divergence; and the disruptive implications of AI.
2
min
Video
2025-05-31
Income: the hard worker in your portfolio deserves more credit
Income from cash is good but income from bonds is better. In a less certain macro environment, Nick Samouilhan thinks the case for income only gets stronger. How can investors make the most of the opportunities?
5
min
Article
2025-04-30
Three ways to elevate your portfolio in 2024
As a new investment era takes shape, where should investors focus their attention in 2024? For multi-asset strategist Nick Samouilhan, three areas are top of mind: higher yields, the importance of stock selection and how to position for structural change.
Article
2026-01-31
Chart in Focus: Income investing is not just about “chasing yield”
Higher yield doesn’t necessarily mean higher total return. What are the trade-offs investors need to be aware of when looking for income?
Quick Take
2024-10-31
Three themes (and what they mean) for income investors
With several macro crosscurrents at play, Portfolio Manager Peter Wilke suggests that income-oriented investors not lose sight of the “big picture” in their quest for yield.
Article
2024-08-31
URL References
Related Insights
DISCLOSURE
This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management. This document is intended for information purposes only. It is not an offer or a solicitation by anyone, to subscribe for shares in Wellington Management Funds (Luxembourg) III SICAV (the Fund). Nothing in this document should be interpreted as advice, nor is it a recommendation to buy or sell shares. Investment in the Fund may not be suitable for all investors. Any views expressed are those of the author at the time of writing and are subject to change without notice. Investors should carefully read the Key Facts Statement (KFS), Prospectus, and Hong Kong Covering Document for the Fund and the sub-fund(s) for details, including risk factors, before making an investment decision. Other relevant documents are the annual report (and semi-annual report).
© 2024 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Overall Morningstar Rating for a fund is derived from a weighted average of the three, five, and ten year (if applicable) ratings, based on risk-adjusted return. Past performance is no guarantee of future results.
Issued by Wellington Management Hong Kong Limited. Investment involves risk. Past performance is not indicative of future performance. This document has not been reviewed by the Securities and Futures Commission of Hong Kong.
