Matt Dennis

Navigating the Funding Panorama: Insights from Matt Dennis

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With a career spanning over two decades in the world of finance, Matt Dennis has established himself as a seasoned investor and astute portfolio manager. Having spent the majority of his career managing international equity portfolios for INVESCO, Matt recently embarked on a new chapter, founding S5 Capital, an investment firm based in Austin, Texas.

During his tenure at INVESCO, Matt’s keen eye for opportunities and meticulous approach to managing multiple mandates led to remarkable success. He skillfully grew institutional and retail consumer portfolios to surpass $30 billion, all whereas sustaining a deliberate and arranged every day routine.

Matt’s journey as an investor and his steadfast dedication to productiveness function the inspiration for the insightful interview that follows. As we delve into the present funding panorama and discover rising alternatives, Matt’s experience and balanced perspective supply worthwhile insights to traders searching for to navigate the complexities of right this moment’s ever-changing monetary world.

What are you seeing within the present funding panorama?

The present funding panorama is marked by a mess of contemporaneous dangers that skilled traders ought to take severely. These dangers embrace the quickest tempo of financial tightening by the Federal Reserve in 4 many years, nonetheless excessive and probably sticky inflation, deteriorating progress indicators, and historic debt ranges. Worrying company and sovereign credit score dangers come up as loans mature and are refinanced at materially greater charges.

Along with these financial dangers, there may be additionally a deterioration in geopolitical relationships, significantly between China and the West. Moreover, there’s a reversal within the development in the direction of globalization and rising commerce protectionism, together with the unavoidable math of demographic curves. So as to add to the challenges, there’s a rising chance of a recession within the US, contrasted with the prospect of a delayed however probably sturdy restoration in China’s financial prospects.

Probably the most related issue that traders should acknowledge right this moment is the probability that the four-decade-plus decline in rates of interest and the constructive assist it has lent to asset returns is over.

Whereas every of the threats within the present funding panorama is manageable by itself, collectively, they introduce a stage of complexity that may be tough for a lot of traders to navigate. The dangers pose important threats to funding returns and introduce the prospect of above-average volatility.

Regardless of the decline in equities and the rise in bond yields all through most of final yr, current strikes in bond and fairness costs counsel that the market continues to take a comparatively optimistic view of the possible outcomes and the power of the economic system, financial and monetary authorities to handle by way of these challenges successfully. Nevertheless, the funding panorama stays rife with dangers, and the chance premium embedded within the value of many belongings is insufficient, representing a transparent menace to funding returns.

Amidst the probably volatility within the funding panorama, considerate traders who can mix an acceptable diploma of composure, a strong evaluation of worth, and an enough time horizon ought to be capable of make the most of the numerous upside alternatives that may emerge. This may be achieved with a level of draw back safety that has been absent for greater than a decade.

What different dangers are you targeted on?

Two further elements to contemplate are the company bond refinancing threat and the ballooning US fiscal burden. The rise in borrowing prices over the previous yr has left a good portion of the company bond market susceptible and poses a ticking time bomb for fiscal budgets.

Roughly $2 trillion in company bonds are set to mature within the subsequent 12 months, with a cumulative $6-7 trillion scheduled to mature over the following 36 months. All of this debt is prone to be refinanced at a lot greater rates of interest, which can additional stress company income.

What’s much more regarding is {that a} important quantity of the debt coming due by 2025 is rated “BBB-” (dangerously near non-investment grade standing). A credit score downgrade to a “BBB-” rated bond would place it within the junk class, with ominous implications for traders and probably workers in these companies.

The reckless spending by the US authorities over the previous decade is a significant concern, however evidently the mathematical realities dealing with fiscal decision-makers haven’t been totally grasped by traders. Politicians have been spending with out restraint, and we at the moment are $31 trillion in debt, with that determine anticipated to rise considerably within the coming decade attributable to rising entitlement spending and rising funds deficits. This can solely be exacerbated by the burden of upper curiosity expense.

The arithmetic appears like a foul dream, and except our elected officers change their spending habits, we will anticipate more cash printing and better tax burdens to be imposed.

The present cycle will result in winners and losers, and the excellent news is that this can end in a brand new wave of alternatives. The rise in capital prices will make many investments uneconomical for companies, resulting in the decline and even the demise of many others with enterprise fashions reliant on low cost capital. On the identical time, incumbents that took benefit of low cost credit score to make substantial investments might discover it tougher for brand spanking new entrants to problem their positions. The potential winners will likely be these with steady money flows, extra capital, and liquidity to grab alternatives introduced by distressed conditions. Buyers ought to give attention to companies with pricing energy, low capital depth, sturdy stability sheets, and wholesome money era which might be higher positioned to outlive and even thrive within the present setting. Excessive-quality company bonds, treasuries, and money are additionally viable choices.

What alternatives do you see if the deglobalization development we’re seeing prevails?

It’s not stunning to see a rise in geopolitical and commerce tensions, as governments and companies are pressured to reevaluate their pursuits within the wake of pandemic-related disruptions and structural vulnerabilities. This has led to a speedy restructuring of worldwide provide chains, with a give attention to reshoring to extend resilience. This transformation would require important funding and can stress long-standing commerce relationships whereas cultivating new ones. Latin America and Asia, excluding China, are well-positioned to learn from the US provide chain transformation, supplied they provide safe and steady manufacturing and assets. Home politics and commerce stress from China will likely be major elements figuring out the success of this initiative. The development, information, industrial, and transport sectors ought to all profit from the reshoring momentum.

How do rising markets rank in your funding listing right this moment, significantly given what appears like a barely bearish view on the greenback?

The connection between the greenback and rising market (EM) returns is an effective query to contemplate. A weaker greenback, the top of Federal Reserve tightening, and the potential for a Chinese language financial restoration would all be useful for EM efficiency. Moreover, there could also be a shift in considering amongst EM traders relating to the security of their capital investments within the US, particularly after witnessing how the US and the West handled Russia and Putin over Ukraine. This implies that EM financial savings which have funded US deficits for many years might even have peaked, with more cash staying native and supporting funding, consumption, and progress.

Furthermore, the West’s makes an attempt to isolate Russian vitality exports have led to a scenario the place many energy-dependent economies are paying for Russian, Iranian, and Saudi oil and gasoline imports with native currencies, thereby decreasing the demand for US {dollars}. All of that is related to the continuing debate about anticipated US greenback returns and the potential for a interval of EM asset outperformance, significantly since US traders stay underweight in non-US investments typically after a decade or extra of US outperformance.

You talked about demographics earlier. How are you factoring this into your funding technique?

Demographic concerns have gotten more and more necessary, as labor forces in lots of international locations are shrinking. The child boomer era was already reaching retirement age, however the pandemic has accelerated retirement selections for a lot of people. Though persons are working longer, we at the moment are at some extent on the age curve the place demographic elements are taking part in a extra important function in lots of international locations, together with the US and China. These elements vary from the price of social applications to the demand for healthcare services.

Europe has been grappling with demographic challenges for a while, offering a helpful roadmap for the way progress and home coverage priorities would possibly evolve elsewhere. As such, demographic concerns are prone to have a big affect on funding methods and alternatives, in addition to broader financial traits, within the years to come back.

It’s broadly acknowledged that the price of entitlement applications within the US far exceeds the accessible belongings to pay for them, given the steadily getting older inhabitants and years of inventive accounting. How this case will play out sooner or later is unsure, however all choices are prone to be thought-about, together with means testing, delayed retirement age thresholds, and better taxes. In the meantime, new and highly effective traits are already rising, resembling hospital effectivity options and gene-based applied sciences for testing and merchandise. Consequently, healthcare publicity is anticipated to learn from structural tailwinds, creating new winners and losers within the trade over the following decade.

How do you see synthetic intelligence impacting the funding panorama?

Synthetic Intelligence (AI) and Automation are essential productiveness levers for the economic system, and the current arrival of ChatGPT and different rivals within the AI arms race might symbolize an inflection level. AI is anticipated to drive innovation and facilitate processes that had been beforehand unimaginable. Moreover, the numerous funding in new greenfield capability and brownfield restructurings as provide chains are reconfigured will function the next mixture of automation and AI-supported software program funding.

At current, it’s difficult to determine clear winners and losers within the AI area. Nevertheless, corporations with sturdy incumbent positions within the industrial/automation area are well-positioned to learn from this multi-year funding development. Some examples of such corporations embrace ABB, GE, Schneider, Siemens, Emerson, Rockwell, and others. As the usage of AI and automation continues to develop, these corporations stand to learn from their experience and expertise in these areas.

How constructive are you on the inexperienced vitality theme?

There’s a rising alignment between authorities, trade, and shoppers searching for to shift in the direction of inexperienced vitality options, which is stronger than ever earlier than. This has important implications for the price of vitality going ahead, following a number of many years of generally risky however typically cheap vitality. As we speak, Western authorities vitality coverage is inflationary, because the manufacturing of fossil fuels is discouraged, and funding in inexperienced vitality is inspired to pursue long-term local weather coverage aims. Consequently, the vitality transition is prone to be inflationary.

The Inflation Discount Act and tax and monetary assist will likely be important within the US, with different nations prone to reply similarly to assist inexperienced vitality options. US funding is anticipated to develop into extra significant from 2024 and final for a number of years, supporting infrastructure funding in areas resembling grid, transport, vitality storage, producers {of electrical} elements, software program options to handle vitality manufacturing vs demand, renewables (together with carbon-free options), electrical car proliferation, and extra.

In brief, the vitality transition, vitality safety, and provide chain reshoring will all result in extra funding in vitality options (each fossil and inexperienced) and needs to be excessive on traders’ radar for alternatives.

Inexperienced vitality options are transferring nearer to changing into a actuality, however we’re nonetheless a number of years away from utterly transferring away from carbon-based vitality sources. The tempo of client adoption of inexperienced vitality options stays unsure, with a lot of the progress to this point pushed by fiscal coverage incentives somewhat than client demand.

Early adoption of inexperienced vitality options is extra prone to happen within the industrial sector, pushed by tax incentives and the potential for vitality productiveness enhancements. Nevertheless, fossil gasoline producers have gotten extra disciplined of their capital allocation, and if vitality costs stay agency or rise, they need to generate important money circulate to assist dividends and fairness returns for companies targeted on conventional vitality sources.

Within the close to time period, declining client and industrial demand attributable to a recession represents a headwind for conventional vitality companies. Nevertheless, if inflation stays sticky and structurally greater going ahead, these companies and different commodities can function a helpful portfolio hedge. Any near-term weak spot of their fairness costs needs to be seen as a shopping for alternative for long-term traders.

Reasonably than selecting between inexperienced and fossil gasoline vitality sources, it’s smart to give attention to an “and” strategy in the meanwhile, recognizing the potential alternatives in each areas.

Be taught extra about Matt Dennis of Austin,Texas on his web site.

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