Last Monday we woke up with a surprise: the lowering of medium-term interest rates by the Central Bank of China, with the aim of avoiding a greater economic slowdown. What is your opinion of this measure?
It has been a surprise, but if we analyze it and see China’s three main objectives in the next ten years, which are climate action, the fight against inequality and the desire to have greater economic independence both in terms of the currency (independence of the renminbi against the dollar), such as independence in the face of semiconductors, we better understand China’s performance. Starting with the desire for independence from China on an economic level, what we see is that it needs to create a zone of influence in Russia and build trust on the part of its trading partners so that they carry out operations in renminbi, borrow money in renminbi, and to To achieve this, China needs to have a strong and solid renminbi and capital market, and for this it clearly needs to attract international investors. That is why we also understand the action of the Chinese authorities at the end of 2021, which has been quite restrictive. And, on the other hand, what we see is that China needs to grow, it cannot afford zero growth and it needs to create jobs, less than a few years ago, but it needs to create jobs. At Tikehau we believe that China is going to achieve it but not in any way, but with conditions on the one hand social and on the other environmental, with which we do not see a lax growth as we have seen in recent decades, but rather a fairly controlled growth.
For its part, the US seems to row against this new Chinese measure and the rate hike in the American market seems to arrive in just two months. What will be the main effects on the markets of a possible increase in interest rates in the face of rising inflation?
We are clearly seeing that the US and China are going to oppose each other in terms of monetary policy, at least for now. It should be remembered that in 2020 China was the only developed country in the world to have growth and positive rates, while the US was at -3.5% losses, so we see that the two countries are in different cycles. The first effect of rate hikes in the US if we look at fixed income is the drop in fixed income prices; we will have to see the behavior of the market in the coming months but we clearly see that we have to be cautious in sovereign fixed income in the US and especially seeing that the durations have been rising in recent years, with which we are being very cautious with the durations especially In U.S.A. In equities, the first effect is going to be noted in the valuations, simply due to the effect of the cash flow discount; the valuations of the companies are going to tend to go down and especially those of those companies that have been rising indiscriminately in recent months and years; now we will probably see more dispersion in companies that have risen without solid fundamentals and may fall. With all this, at Tikehau in equities, and in the US especially, the companies where we see value are companies that have barriers to entry, that are going to be able to fight against inflation and rate hikes, that have high margins and that have little indebtedness; that is the type of company that will probably be able to be on the bright side of this rising rate environment.
Expectations of the ECB’s action in this situation
What we see is that the ECB, at its meeting last December, already made the decision to end the post-pandemic measures and they are not going to be withdrawn and disappear soon, and they have also agreed to gradually reduce all monetary measures and investments that have done lately. What the ECB wants to avoid at all costs is to create volatility in the market, therefore, it is clear that the ECB is going to be increasingly restrictive, but we are not seeing a rate hike in the short term. It will probably be in the next stage but we don’t think it will be something that will be considered in the short term.
In Spain, compared to the rest of Europe, do you think that inflation is more or less transitory?
At Tikehau Capital we have been talking about structural rather than transitory inflation since the beginning of last year, and there are several reasons for this. The first is a micro reason for companies; At Tikehau we manage 32,000 million euros, of which two thirds are in illiquid assets, that is, in private debt or venture capital, and we are in daily contact with the companies and what they transmit to us is a concern about inflation and its duration , since costs will continue to rise due to a lack of supply and a rise in wages. On the other hand, we see structural inflation on the macro side due to several factors: the end of globalization, especially after the pandemic, we see many companies are bringing their means of production back to Europe and that increases prices, since we see an increase in trade barriers, that is, protectionism, a trend that will continue in the coming years; We also see an increase in taxes, in the 1980s the average corporate tax was around 46% and in 2020 it was 25%, so it has fallen a lot and we can talk about deflation in that sense, hence the general trend is, as was pointed out at the last G7 meeting, that of a common desire to raise taxes or that there be uniform minimum taxes, something that will also lead to an increase in prices; and lastly, a demographic factor and an increasingly lower labor force worldwide, with which wages are increasing.
With the aforementioned scenario, what role will the Ibex 35 banks play this year?
At Tikehau we are not currently investing in our investment funds in banks; yes, we are investing in banks and also in some Spanish banks through financial subordinates. In any case, we are positive in the financial sector, especially in Spain, and we see that the metrics are good and at least comparable to other entities in the financial sector. We believe that there are banks that have done their job cleaning up their balance sheet and eliminating the most risky assets from it, with which right now they can optimize their capital more and therefore the risk-return is rising. We are positive in the sector but it is true that when it comes to investing in equities it is not a sector that we have today.
What will be the winning sectors in the short-medium term?
At Tikehau we like to invest in quality equity companies that have several criteria: a high return on capital, little indebtedness, expansion capacity and entry barriers because it allows them to have flexibility and increase the price without affect your sales. With the prospects we have for inflation, it is key to invest in sectors such as basic consumption in which we find companies like Coca-Cola, which if it increases its price by 5% will not be relevant because the consumer will continue to buy it; We also see it in the technology sector, for example a Microsoft that has just increased its office pack by 15% and the consumer has to continue buying it because they have no other choice, with which there is elasticity and that is the type of company that we like it because it will be able to weather that rise in inflation.
What will be the role of cryptocurrencies and stablecoins in this potential rate hike environment?
At Tikehau Capital we are not investing in cryptocurrencies nor do we plan to do so in the short term. What we do believe is that we have to follow cryptocurrencies very closely and see what the central banks are going to do because right now they are looking very closely at blochchain technology to incorporate it and use it in the near future. In the face of rising prices, in theory investing in bitcoin should make it possible to fight inflation since supply is limited, but the problem we see is that from one day to the next bitcoin can be perfectly banned. Therefore, we prefer to be outside, but always closely watching the actions of central banks in cryptocurrencies in the coming months.