Q1 of 2024 has seen a slight reacceleration in inflation data in the US on a month on month basis, which has brought some market participants to question whether the disinflation story is still intact.

 

This is a matter of US exceptionalism. Core inflation numbers continue to show disinflation if not outright deflation in the Eurozone, the UK and China when looking at the last six months.

In the US however, core PCE and especially core CPI have seen a more notable reacceleration in recent months. For the moment we would tend to fade this uptick. The first quarter of the year is notoriously affected by residual seasonality in inflation data. Real inventories in core goods remain quite meaningful from a historical perspective, suggesting that there might still be some disinflation from that portion of the basket. The real driving force remains services however and especially shelter. Many measures of new rents are back to pre-COVID levels when looking at YoY growth and some measures are even in outright deflation territory. Admittedly shelter CPI is taking longer than expected to reflect this, but we still believe that we will ultimately see lower shelter CPI at some point. Outside shelter, the aforementioned softening in the labour market we envision makes us confident that we should see a slowdown in wages. A number of wage tracking indices that we follow appear to show wage growth gradually heading back to levels more commensurate to a 2% inflation world.

Finally, it’s important to keep highlighting how soft money supply growth is around much of the global economy. We believe this, in and of itself, makes it difficult to sustain these higher rates of inflation in the US and much of the developed world.

Investment implications

We see material value in government bonds in developed markets (US and Australia in particular) and in some emerging markets (S. Korea, Brazil, India) and prefer to keep historically high duration exposure across our portfolios. We see meaningful value along the curve and keep a diversified stance in terms of maturities. After the latest sell-off seen in April, government bonds look somewhat oversold and even modest economic downside surprises could generate some decent yield retracement given how bearish sentiment is today on rates.
Corporate credit markets look complacent, with global investment grade and high yield spreads well below long-term averages and well below recessionary averages. The beginning of 2024 has brought strong refinancing activity and many companies have already worked their way through the maturity wall. Not all the increase in rates has been absorbed yet and cost of debt might still see a meaningful uptick in the coming months for many companies. The increase in idiosyncratic volatility and the substantial “amend and extend” activity in the background are also possible signals of stress. The increase in alternative sources of financing like private credit makes the overall fundamentals and valuations data picture more uncertain as well.

Notwithstanding the above, the overall level of yield provides a decent cushion which will support total returns even in an environment of higher spread volatility especially within investment grade, where strong investor demand to lock-in yields has been a key supporting factor. More recently, high yield markets started to see an increase in investor demand as well.

 

We see dispersion across regions, rating segments and sectors. In particular, the lower quality segment of the European HY market continues to be out of sync with the rest of the market, but the aforementioned idiosyncratic stories might have played a key role in keeping spreads wider here.

Considering our outlook, we continue to see value in more defensive sectors such as telecommunications, healthcare, consumer staples and selectively across financials, where relatively short call CoCos can provide some very compelling risk – adjusted yield (although the trade has already partially played out in Q1). We see weakness ahead in more cyclical sectors (e.g. chemicals) or in areas more exposed to consumer behaviour (e.g. automotive, retail).

 

Emerging markets can offer some interesting stories in the corporate space, but it’s mostly about single names in major countries (e.g. Brazil, Czech Republic) rather than broad attractiveness for the asset class.

 

We remain prudent in the FX space, keeping exposure only in those areas where we find clear justification in terms of outstanding real yield (e.g. Brazil) or a strong economy and supportive technicals (e.g. India). We keep a constructive stance on the USD.

The value of active minds: independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Important information

This communication is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors.

The views expressed are those of the speaker at the time of recording, are not necessarily those of Jupiter and may change in the future.

Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.

Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.

Issued in the UK by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. Issued in Hong Kong by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission.

 

No part of this commentary may be reproduced in any manner without the prior permission of JAM, JAMI or JAM HK.

 

*In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong).and in Singapore, Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore.