Finding a clearer path down the foggy road to normal

17 March 2022

ClientCommoditiesEmerging MarketsGlobalInflationInterestMeeting of MindsMeeting of MindsMindful ofWealth managementWealth Management and Private Banking

Expert: Mike Gitlin, Partner, Capital Group. Facilitator: Blaise Cardozo, Director, Sionic


  1. Central banks need to raise rates, but the long end is pretty firmly anchored
  2. Inflation will be with us for a while - energy costs, commodities, wages etc were all creating pressure before Russia invaded Ukraine
  3. The four roles of fixed income (diversification, capital preservation, income, inflation protection)
  4. A new paradigm for China has taken over from the long-standing growth objective
  5. Private credit is a bubble that is about to burst 


Central banks need to raise rates:

Rates need to be raised, not only to counter inflation but also so that central banks have some levers to use when the next recession comes, apart from pausing QT. 

Where will rates go? Not as high as Brazil which is already at 9.75%

- Fed: to 2% this year and then maybe above 2.5% (eg 3% or 3.5%, but not 7%)
- ECB: likely to turn positive in about a year, to 1% or 1.5%, probably not above 2%
- BoE: maybe up to 3%, but not as high as 5% 

Demand for longer term assets is high and looks likely to stay that way, so there will be ongoing pressure to keep the long end of the yield curve low. 

Inflation will be with us for a while:

Supply constraints will continue to add pressure, and further draconian responses to renewed covid outbreaks in China will constrain supply further. 

The four roles of fixed income:

Over the next 5 years a well-structured fixed income portfolio, comprising high yield, emerging markets, global aggregate and global corporates, will yield 4 - 5% pa 

This is not bad compared with the current range for capital markets assumptions, say 4 to 8%, but which could be zero or negative depending on the impact of the war in Ukraine. 

The new paradigm in China:

Common prosperity objective has taken over from the long-standing growth objective.

It’s not going to be growth-positive, at least in the short term. However, President Xi thinks long-term. There are already 200 million people in China with 6 figure incomes. 

Long-term also applies to intentions regarding Taiwan which remain unchanged in Xi’s long-game. 

The West’s reaction to Russia (rapid and united) is a strong signal to China, so any Taiwan move is very unlikely in the near-term. 

Overt support by China for Russia is also made less likely, but it’s not clear if investment in China could be ‘closed’ in the way it has been for Russia - China is a much larger proportion of the global economy. 

Private credit is a bubble that is about to burst:

Private credit is not the same as private equity: the chances of recovering anything if things go bad are minimal. 

People need to put money to work but seem to be throwing caution to the winds - the covenants are dreadful. 

Certainly, don’t invest there now, but maybe consider after the bubble bursts. 

Key Takeaways:

  • Central banks should get on with raising rates
  • With all the uncertainty, ensure your client portfolios are ‘super-aggressively balanced’
  • If you’re sitting on cash in investor portfolios (and one large firm was called out as currently having 15%), they would be better served by the four roles of fixed income
  • Better to wait for credit spreads to widen further before investing in high yield. If you can, take more than one bite of the cherry rather than fully investing now
  • Wait for the private credit bubble to burst before thinking about putting any money there
  • Is there a clearer path down the foggy road to normal? The path was not clear before Ukraine and is now foggier than ever.  And ‘normal’ may never return – central banks are thinking ‘lower for longer’