The market “should just enjoy” the long-awaited interest rate cut by the US Federal Reserve “for now”, but investors should “be prepared” for the risk of inflation “coming back sooner”, says Jeffrey Jaensubhakij, group chief investment officer at GIC.
“You have tight labour markets across the US, Europe [and] Japan; the risk of inflation coming back sooner may be there,” says Jaensubhakij. “I think because the rates have priced in so much but the economy remains strong, the risk is that rates don’t go down as much.”
Speaking at Milken Institute’s Asia Summit 2024 on Sept 20, Jaensubhakij says the markets are split “in some ways”. “Interest rate markets are sort of saying ‘You need to cut rates enough’, as if we were going to go into [a] recession; but the equity market, on the other hand, [they] are sort of saying ‘No, actually we’re going to accelerate the economy [and] earnings growth is going to come back.’ Only one of [these] themes will be right.”
Fed chair Jerome Powell did signal a “pretty dovish” tone while announcing a 50-basis point rate cut on Sept 18, says Jaensubhakij. “Not only do they want to do that 50[bps], but you know they’re going to do more this year and more next year.”
According to Jaensubhakij, some of its investee companies “do borrow a lot”, so “they’re hoping that rates will come down”.
The US economy “doesn’t need even more fiscal stimulus”, says Jaensubhakij. However, US presidential candidates Kamala Harris and Donald Trump have mentioned such plans in their respective campaigns. “Unfortunately, I think in politics, spending money [and] giving away money is the best ‘vote-getter’,” Jaensubhakij adds.
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The next US president runs the risk of pushing “too much fiscal stimulus”, he says. “It’s not done yet, and a split House [of Representatives] and Senate may mean that a lot of things can’t get done.”
But will that be better for business, asks moderator Martin Soong, news anchor at CNBC. “Probably,” Jaensubhakij answers.
Valuations down
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Institutional investors should prepare to stomach declining valuations, says Jaensubhakij. “As an allocator, we see across a whole range of funds, and the truth is that in 2021 and into half of 2022, the funds put a lot of money to work at very high valuations, some of which will have to come down when you exit.”
Jaensubhakij estimates that “only a quarter” of funds can introduce operational improvements to investee companies “that will allow their ebitda to outgrow enough the declining valuation”.
Returns from past investments “will probably disappoint what we underwrote”, says Jaensubhakij. “That’s a large part of the portfolio.”
Jaensubhakij adds: “But on new investments [that] we’re doing today, or that the funds are doing today, if they’re patient enough, and [the] price expectations of sellers start to come down, you will be able to get better returns from new investments and then the funds that really do the operating improvements will outshine the others.”
Jaensubhakij says the gap between the winners and the laggards will only widen. “We will see differentiations between managers and between industry companies over the course of the next few years and, of course, we’re always hopeful that we’re in the right funds, in the right co-investments and so on.”
