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Whisper of tailwinds blowing as inflation soften: Neuberger Berman
While still high, inflation in developed economies is showing signs of slowing down according to New York-based investment management firm Neuberger Berman, with markets set to benefit from increasingly stable conditions.
Markets have largely recovered from ructions caused by the mini banking crisis involving the collapse of Silicon Valley Bank earlier in the year, with the initial panic dissipated. Liquidity issues at smaller banks need to be monitored, and the banking outlook is still uncertain, but the level of caution is prudent.
In a recent note to investors, The $460 billion manager explained another rate hike may be in store for global economies because inflation is broadly far above 2 per cent. But with inflation expected to slow this quarter, any further rate hike should be final for the immediate future.
After two years of rising rates battling combat inflation, the war is showing signs of abating. “The level of inflation should continue to recede gradually, first in the U.S. and later in Europe,” Neuberger Berman stated.
“In Europe, impacts from the Ukraine invasion are starting to fall out of the data series, which should contribute to European inflation moving lower, starting with headline numbers and followed by core inflation.
Similar to the U.S., services inflation in Europe remains elevated, however, and may be slow to moderate according to Neuberger Berman. So while the European Central Bank may put interest rates on hold they are unlikely to cut them.
Nevertheless, as inflation slows and the need to actually increase rates abates markets should enjoy increasingly stable conditions with “some positive tailwinds”, the manager believes. Yields will continue to remain higher than what markets are used to.
Looking forward, Neuberger Berman sees “less tactical value” in government bonds than earlier in the year. “Intermediate developed market government bond yields sit fairly close to the lower bound of our expected ranges, making them less attractive than they were a few months ago and potentially vulnerable to a pull-back if central banks fail to ease as much as anticipated,” it stated.
Credit markets, on the other hand, show more promise.
“Credit spreads have widened out of concern around economic slowing and vulnerability to higher debt costs,” Neuberger Berman stated. “As such, we see more attractive relative valuations across the credit universe. With an environment that no longer ‘lifts all boats’, dispersion among issuers tied to management strength, balance sheets and strategic position, will likely surface more readily. Importantly, both risks and opportunities are likely to become more idiosyncratic, which means that credit research and security selection will be critical.”
