Lorenzo La Posta
Sep 12, 2023
In this first episode of Market Notes, Don Valdez, MBA (Investment Director) interviewed Momentum Global Investment Management 's Portfolio Manager Lorenzo La Posta and discussed high interest rate environment and its relationship to the Tech sector.
Don: Welcome to the first episode of Market Notes – Your Guide Inside Market Dynamics, where we bring you the latest insights and updates from the world of finance. I'm Don Valdez, Investment Director of Astraasia, and I'm excited to be your host on this journey to navigate the ever-changing landscape of the financial markets. So, let's dive right into our current market dynamics!
Today's episode is all about ‘higher for longer’ interest rates that triggered a sell-off particularly in the high-growth tech stocks that tend to be sensitive to rising interest rates and bond yields.
We have invited Lorenzo La Posta, Portfolio Manager at Momentum Global Investment Management, to share his expertise with us.
Thank you so much for joining us today, Lorenzo. We're thrilled to have you on our first podcast!
Lorenzo: Thank you for having me, Don. It's a pleasure to be here for your first episode.
Don: As a portfolio manager, you have a unique perspective on the financial markets. Could you tell our listeners a bit about your background and experience in the industry?
Lorenzo: Of course, Don! I had a very technical education, having graduated in Physics first and then in Financial Engineering. I always enjoyed mathematics, and in fact I joined the industry as a fresh graduate in 2016, as a Quantitative Strategist for a large Swiss private bank. In time though I got closer to financial markets and investment research, and joined Momentum in 2018, as investment analyst first and grew into a Portfolio Manager. But even today, I spend as much time researching investment ideas as I do managing portfolios.
Don: That's impressive, Lorenzo. With your extensive experience, I'm sure our listeners are eager to learn from your insights. Firstly, interest rate, particularly in the US has risen above 5% already in a span of 1 year. Do you still see any further rate hikes?
Lorenzo: Well, interest rates have certainly gone through a wild ride, and now safe-haven government bonds are offering yields not available since before the Global Financial Crisis. As you mentioned, you can now make 5% on a 2Y US treasury bond and similar or slightly lower yields are on offer across Europe, on the short end of things. However, markets are now expecting an entire rate cut by the end of Q1 2024 in the US, and as many as 4 cuts by next year’s end. This means as much as a 1% lower policy rate. We are of similar view, we think we are almost at peak rate cycle in the US and Europe, whilst the UK might still have a couple of hikes to go to manage the currently more problematic inflationary landscape.
Don: With peak rate cycle in mind, Equity markets had a good run from October last year until the end of July but have lost its ground the past few weeks, especially Tech stocks. Is it due to the latest interest rate hike by the US Central bank?
Lorenzo: Yes, certainly a significant driver behind these more volatile past few weeks has been a weakening confidence around rate cuts, initially expected for the 2nd half of 2023 and now pushed back to 2024. This led to rising bond yields and in turn falling equity prices. But, to be fair, also other dynamics had a negative effect on market sentiment, such as a waning excitement around artificial intelligence and also bleaker prospects for the Chinese economy.
Don: So why are Tech stocks much sensitive to interest rate hikes?
Lorenzo: Technology stocks are often “growth” names, where investors are willing to pay a premium price for the expectation of higher-than-average growth, which in turn means much higher earnings in the future compared to today. As a consequence of this unbalanced expectation, growth stocks are in practice long-duration assets, and similarly to long-duration bonds, they are much more sensitive to changes in interest rate expectations, outperforming when rates fall and underperforming when rates rise.
Don: With heightened volatility this past few weeks, Are there any reason for investors to panic at this stage?
Lorenzo: No reason to panic. It’s true that uncertainties are many today, but that’s almost always the case and anyway markets have well priced all risks into current valuations. Economies have proven more resilient than expected, increasing the chances of a “soft landing”, and inflation has been coming down steadily to more moderate levels and even though we’re not yet at long-term central banks’ targets, the lagging effects of rate hikes on the real economy are now playing out and if markets’ expectations are broadly correct, then we should be almost done with hawkish moves.
Don: Sounds positive for investors. Lastly, Does the market correction presents opportunities?
Lorenzo: Market corrections always do! For instance, today we’re seeing compelling valuations across Japanese and UK equities, and good upside potential in some private equity or infrastructure investments. But to me, the most interesting piece of news are government bonds, that for many years have offered near-zero income and not enough capital protection, and instead now a once again reinstated as a key component of multi-asset portfolios, offering attractive and guaranteed income with virtually zero default risk, with some upside potential as policy rates reach their cyclical peak and begin to fall.
Don: I guess the key takeaway is diversification. We’ve focused on Tech stocks but the latest move by the US central bank or macro environment also presented opportunities in other assets like infrastructure and bonds.
Thank you for sharing your expertise, Lorenzo. Your insights have been incredibly enlightening.
Lorenzo: It was my pleasure, Don. I'm delighted to contribute to Astra’s podcast and help your listeners gain a better understanding of the financial markets.
Don: Thank you once again, Lorenzo. And to our listeners, we hope you found this episode informative and valuable.
Join us again for our next episode of Market Notes – Your Guide Inside Market Dynamics, where we bring you more insights and expert perspectives. Until then, take care and happy investing!