Upon his return from a trip to the United States, Michele Gesualdi, Kairos manager and partner, shares his notes from thought-provoking discussions with a handful of American managers. While the general feeling is that economic stability and high valuations are stuck in a tug of war, from a structural standpoint, the economy gets a good bill of health, with growth realistically forecast at around 2% for the next quarter.
A quick glance at equities and credit
“Equities have most likely reached the end of a rather mature recovery cycle, but US managers continue be very positive about overall opportunities. Until now, we have seen little differentiation between securities, but the normalization of rates should reveal the strength of certain businesses as opposed to others, which without the zero interest rate policy would not have survived.
The rise in interest rates should not have significant repercussions on credit because it will be offset by compressing spreads. From technical point of view, European investors demand excessive returns and their expectations must be managed, as returns will most likely be limited to the yield of each note and we will not be able to rely much on bond appreciation in the short term.”
Let’s talk about “innovation”
“At this point, we are used to hearing about “disruption”, but the quantity of ideas and disintermediation in traditional businesses always exceeds expectations. For instance, looking at the healthcare/biotech sector, we see new therapies developed through human genome coding, and in the automotive sector we find new business models, from car sharing to driverless vehicles. The US economy brings us original business models with the potential to change the way we live.”
And to conclude with thoughts on interest rates and the dollar…
“Interest rates will rise in September or afterwards, but the increase will in any case be gradual and the Fed is well aware that the US economy is not in a position to absorb hikes of over 1.5% – 2%. On the other hand, the Fed is expected to take an increasingly sensitive stance to the dollar, and this will require a slightly more active approach in the management of these trades.”