Populism – the thin ideology that spawned Brexit, support for Donald Trump and Australia’s newer political parties – will create winners and losers in fixed interest markets, Goldman Sachs executive Philip Moffitt says.
As long as people continue to reject traditional parties and what they believe are the corrupt elite, inefficiencies will appear in fixed interest markets and provide investment opportunities, the head of fixed income at Goldman Sachs Asset Management Asia-Pacific said.
“If the populist process continues, and the breakdown of basically traditional political affiliations, and parties [keep] rejecting more orthodox economic leadership in the US and in other places, too, then we’d expect inefficiencies to increase,” Moffitt told the 2017 Investment Magazine Fixed Income, Cash and Currency Forum in July.
“Inefficiencies don’t necessarily mean that the entire structure of inflation and interest rates has to rise, but the differentiation of winners and losers in that space will have to rise.”
He said assets such as commercial real estate, asset-backed securities and other spread products, which had benefited most from central banks’ quantitative easing, or monetary policy designed to stimulate private-sector spending, will suffer most.
“We’re going to get much bigger dispersion around quality and particularly as the support for fixed income markets goes,” he said. “We would expect the assets that have benefited the most from quantitative easing globally, which [includes] spread products and commercial real estate – those higher-yielding assets that have been squeezed right down – is where the damage will be done.”
Moffitt said investors would need to find differentiation and “bet against” the current winners, particularly while interest rates are low.
Meanwhile, Goldman Sachs will continue to monitor China as it recognises fiscal policy isn’t working to control economic growth rates there.
“What’s going on in China is a fascinating exercise in monetary policy without changing interest rates,” he said. “What’s happening in China is volatility is being put into overnight funding, so rather than the level of rates going up, the volatility around those rates is going up and there’s a level of persuasive pressure from authorities on the main banks to cut back their lending to the non-banking financial sector.”
For non-bank financial lenders running a leveraged balance sheet, this uncertainty makes doing business harder.
“It’s a very interesting approach to squeeze the peripheral lenders out of the market without imposing higher rates on the entire system,” Moffitt said. “What the central bank’s doing and how the politics are changing in China, coming at the same time as populism globally, is [resulting in] a shift away from monetary to fiscal policy.”