Capital IdeasTM

Investment insights from Capital Group

Episode 21 - Outlook 2024: Long-term perspective on markets and economies – Part 2
Mario Gonzalez Perez
Managing Director Financial Intermediaries Iberia
Robert Lind
Flavio Carpenzano
Investment Director
Katharine Dryer
Head of Equity Business Development

Heading into 2024, it is difficult to remember another time when the outlook was so uncertain. Recession or expansion? Inflation or deflation? Higher interest rates for longer or central banks preparing to pivot? The second of a two-part series features Mario Gonzalez Perez in conversation with Capital Group economist Robert Lind, fixed income investment director Flavio Carpenzano, and head of equity multi-asset and solutions business development, Katharine Dryer. Together, they outline their long-term perspective on markets and economies.

Mario González-Pérez is head of the Iberia and U.S. Offshore Client Group at Capital Group, and is co-responsible for leading the company’s Spanish branch. He has 20 years of investment industry experience and has been with Capital Group for 19 years. Prior to joining Capital, he worked at Banco Santander in Madrid. He holds an executive MBA with distinction from London Metropolitan University and a bachelor’s degree in computer science engineering from Universidad de Valladolid, Spain. Mario is based in Madrid.

Robert Lind is an economist at Capital Group. He has 35 years of industry experience and has been with Capital Group for six years. Prior to joining Capital, Robert worked as group chief economist at Anglo American. Before that, he was head of macro research at ABN AMRO. He holds a bachelor's degree in philosophy, politics and economics from Oxford University. Robert is based in London.

Flavio Carpenzano is an investment director at Capital Group. He has 18 years of industry experience and has been with Capital Group for two years. He holds a master's degree in finance and economics from Università Bocconi. Flavio is based in London.

Katharine Dryer is Head of Equity Business Development for the Europe and Asia Client Group. She has 25 years of investment industry experience and has been with Capital Group for 1 year. Prior to joining Capital, she has worked at Jupiter Asset Management as deputy chief investment officer, and at BlackRock as a Client Strategist. She holds a master’s degree in modern and medieval languages from the University of Oxford, and an MBA from Cass Business School. Katharine is based in London.

Catherine Craig: This week on Capital ideas we're bringing you this two-part podcast on our most popular event of the year, the 2024 Outlook.

In this replay, head of the Iberia and US offshore client group, Mario Gonzalez Perez is in conversation with our economist Robert Lind, our investment director Flavio Carpenzano, and our head of equity multi-asset and solutions business development, Katharine Dryer. Together, they outline their long-term perspective on markets and economies. I'm your host, Catherine Craig. Let's get into it.

Mario Gonzalez Perez: Flavio, we were talking about the stimulus. We were talking about cash, a lot of cash in the system. I think it's fair to say that after a very challenging 2022, when fixed income and equity markets did correlate, that was something historical. Cash has been king, and many investors have decided to keep cash, off the sidelines and really invest in cash for full time. And so, I guess looking forward, you know, with the macro environment that we just described, what would be your message to invest that is still remain in cash? Do you think that's going to be special after November? For example, in the fixed income markets, we have, you know, an amazing market, best fixed income month since 1980. So, what would be the message for those investors that remain in cash and perhaps are starting to think about how to position their portfolios for the new era of investing that we are starting now?

Flavio Carpenzano: Yeah, no, absolutely. Cash, if you think it was a great strategy for investors in 2022 because the isolate from all the losses, we're experiencing in financial markets. I'll have a cash as a strategy is more tactical and strategic. It works well, but in a limited period of time and it doesn't work very well when the central bank reaches the peak of the hiking cycle. And this is probably given the discussion that we have today, it seems, where we are now globally. So, the question of the debate that we're having today is not how much central banks are going to hike from here. If they stay higher for longer or they're going to cut at some point? So, from that perspective, all the cash today is becoming quite risky because you lose the optionality or the price appreciation from the equity and fixed income market. And you can see strictly we run an analysis and we show in the previous if you look at the Fed in the US in the previous five hiking cycle, if you invest, if you have really the crystal ball and you invest at the peak of the hiking rates from that point in the three years after fixed income market, if you just look at high quality corporate bonds outperform cash quite significantly, almost 17% on a cumulative basis in the three years after. What is more important is that half of these outperformances happened in the ten months after the peak of the cycle. And if you think that probably the Fed has already done in July with the with the hiking cycle probably is starting to become quite important to deploy this cash you mentioned correctly in November. We always try and sometimes try to time the market. November is a classic example where if you miss one month, you can miss a very strong performance. So is the time to gradually start to deploy the cash despite the uncertainty because the opportunity is there.

Mario Gonzalez Perez: Excellent, thank you Flavio. It is clearly more about time in market rather than timing in the market where so the importance of remaining invested. So, if we use as a framework the four buckets of fixed income that our multi credit strategy can invest in. So that's investment grade, that's high yield, emerging market debt and securitise that as a framework to discuss our views on the fixed income space. Let's start with investment grade in the US. What is our views on that particular asset class has been very popular with some investors is starting to become more invested in the market as a first entry point? What are our views on the asset class for 2024?

Flavio Carpenzano: Yeah. Investment grade this being an interesting asset class has been mainly driven by rates in terms of total return. Again, the debate in investment grade corporate. From a valuation perspective, it is yields versus spreads. When you look at yields, it's a varied. And then also we started to hear clients after November rally. They say, oh, is the opportunity gone reality? If you look at IG yield, they just back at the beginning of the year where we were saying, the bonds were back. So, valuation is still attractive from a yield perspective today. If you look at IG corporate market, the offer between five and a half and 6%. So definitely quite attractive. Where you look spreads, spreads here today compress quite a lot. And so now they are in level probably close to the historical average pre financial crisis post financial crisis. So, you might have good from a spread perspective. They are not so attractive. Reality is that if you look in 2024, one, there is still a case that the global IG corporate market is going to outperform the Treasury. If as Rob said, the economy remains more resilient. That is you’re entering, a soft-landing scenario, credit will do relatively well. So, it's going to outperform government bond. But the other part I think is more interesting is about dispersion in credit markets. This is where we started to see and probably as a result of the end of quantitative easing, of less liquidity, more dislocation. And this is giving us as an active manager plenty of opportunity. If you look at the IG corporate market, one third of the market actually is trading with the spread above 150 basis point. Interestingly enough, today you find the attractive opportunity in European banks that they are quite strong, quite resilient from asset quality perspective. Capital is very high. Loan loss provision aside, they basically give a good outlook full of coverage for potential future loss. So, you invest in very solid banks where spread is quite attractive. Chemicals is another sector where you went through a massive widening spread given China destocking. But some of the companies, they have a very strong balance sheet. These are good opportunity and utilities in the US as well. So, what I'm saying from a total yield perspective is definitely an attractive opportunity from a spread on the surface is very tight but tied to fair valuation. But below the surface there are plenty of opportunity for active management.

Mario Gonzalez Perez: Excellent, so very attractive asset class both in the US and Europe, but definitely time for active investors to pick those opportunities wherever they are. I think US high yield has been an interesting asset class. Many of our clients started their year quite negative or neutral on the asset class. The reality is that it has been one of the best performing asset classes in the fixed income space this year. Given the more benign macro environment or the macro view that we have shared, given that high yield is starting to become even more attractive for 2024 and beyond?

Flavio Carpenzano: It's interesting because as you correctly said, high yield surprised the on the upside and not only this year but also last year in 2022, has been for two years in a row, the best fixed income asset class. And one of the reasons is, of course, growth has been more resilient. The second one as asset class tend to have a shorter duration. So, it work well, very well last year when we sold off. But also, this year has been quite resilient. And there is a third aspect which are more technicals. Technicals have been very strong. There was no need for high yield company to refinance any debt. And so, from that perspective, no CFO wants to go to the market and issue that for 8 to 9%, which is basically why supply has been quite low and kept the spread continue tight. So, if you look going forward, there is still the case for high yield. We still remain relatively cautious on the asset class. So, we want to still focus on the higher quality of the market because still the probability of recession in the US is still quite meaningful. But the story there is that much more fundamental perspective. The high yield market has dramatically change. If you look at the double B rate of component is almost between 45 and 50%. This component was 35% ten years ago. So, the quality has increased and the triple C rated companies usually is the part of the market that default. This is much smaller is 10%. And one of the reasons is because part of the default cycle happened already during COVID. So, in a way you are entering the market which is much cleaner. So that's quite a positive backdrop. There is a lot of discussion about maturity. Well, at some point in 2025, highly competitive need to refinance, adapt. Yes, there will be some companies, they will struggle. And again, goes back to the point of security selection and avoid these companies. But reality is that when you look at interest coverage is starting from a very high level between 5 and 6 times. So, it will slow down. It will go down because, of course, they need to issue a higher level of yield if rates remain higher, but still start from a high level. So, I think that concern is a little bit probably overrated, particularly when you combine with the overall yield between 8 and 9%. This is quite attractive. Again, offer a good buffer, one for default and two for potential volatility. So, if you really have a long-term view, high yield market is definitely attractive and offers a good complement to the equity side with potential total return of low double digit with lower volatility than equity.

Mario Gonzalez Perez: Excellent. Thank you. So still constructive, especially in the long term. We are still defensive within our portfolios and again, the importance of being selective and the importance of our approach in this asset class from an active investor important point of view. Let's move into emerging market debt. So given valuations, current yields, you've got a fiscal monetary policy seen in that part of the world. Do you feel this is a good entry point for emerging market debt. If so, where do we see value? So, if you look at our emerging market debt portfolios within Capital, is it more on the hard currencies, more local currencies and more in a particular region is it LATAM, is it the Middle East or is it emerging Europe? Where would we see opportunity in these very exciting asset class?

Flavio Carpenzano: Yeah, as I said, is very exciting and still very complex at the moment investing in them because you can see a two-side story when you look from a proper fundamental perspective of the emerging market countries in general. Overall, they are quite strong, and they are quite strong from a monetary policy perspective. Actually, the monetary policy was way more orthodox than the one in the developed markets. So, as we all know, they hike rates pre-emptively and well before a Federal Reserve or ECB. And the result of that is now you clearly see signs of disinflation in this country. So, this is positive particular for emerging market, local currency. The other side, we were talking about fiscal from a fiscal perspective, actually emerging markets in general, they'd be probably more disciplined in fiscal spending, post-COVID, but even more recently, the antiviral market. So also from that perspective, from a fundamental view, they are quite strong, a resilient, ready to develop market. So, this creates a very strong fundamental backdrop. However, the headwind in emerging market remains external factors, namely US interest rates higher for longer. These might be a struggle for some in that emerging market country. Then we struggle with this environment. The strength of US dollar. As Rob mentioned, this can be another headwind. If you look at China slowdown, this could be another headwind. So that's why I say this is a two-stage story fundamental from a bottom-up perspective. But of course, you cannot invest without considering the external factors which comes back again. So, if I sound like a broken record about security selection and active management, but I think that's the point of the new environment. We need to get used to more dispersion in the market and emerging market is clearly a place. So, the short answer to your question is we still see opportunities. Emerging market, local currency, valuation have become less attractive because the differential of real rates between EM local and US real rates, have compressed, but opportunities still remain. In Latin America, for example, this is a country like Brazil and Mexico. We tend to increase duration in the local currency. That's where we see opportunity in the hard currencies of bifurcated market between high quality investment grade spreads is a fair to relatively tight, but they still started to offer some good opportunity. On the other end, you see the high yield frontier. Emerging market in our currency spreads is quite wide. We talk about 500, 600, sometimes even 800 basis point spread. So, in that case, it becomes really security selection. And today we see opportunities in countries like Tunisia, Honduras, but again, is more a picking up over of country where we don't see opportunities for a market of EM frontier market in local currency. Liquidity is not great and is still a challenging market. But in a nutshell, local currency in a few select like Latin America and hard currency gain in few select high yield or IG for more resilience in the portfolio.

Mario Gonzalez Perez: Thank you and I appreciate that. It's quite difficult to generalise in such a wide universe as well because emerging markets, especially on the debt side, you know, has grown, you know, for the last for the last few years. So, I guess also we touch on investment grade, we touch on high yield. We have just discussed opportunity in emerging markets debt, that I guess the fourth bucket that we would like to cover securities securitised debt. So, I guess the question there is whether we see opportunity could potentially be a value trap as well in some parts of the market. What is our view?

Flavio Carpenzano: Well, securitised credit again is a very broad and fragmented market agency. Non-Agency. If you focus from a credit perspective on the non-agency segment, we definitely find opportunity in the market is more an uncovered area because it requires a lot of expertise and resources to invest in that market. It's been under a lot of pressure. One of the reasons, particularly when you look at commercial mortgage-backed securities, they've been under a lot of pressure given the US banking situation by particular the commercial real estate, which is under pressure for the reason that we all know. So that part of the market was under pressure where you move into more asset backed securities. Like student loans, credit card, you started to see signs of pressure, particularly in the more junior mezzanine tranche, because you see an increase in the credit card delinquencies. You see an increase in student loan delinquencies, which also tied in a way as a preliminary sign of some weakening in the economy in the US. However, from the investment perspective, where we find opportunity is in ABS, or asset backed securities, credit cards through the loan, but even commercial mortgage-backed securities, the point still remains quite defensive and investing the senior part of the capital structure. So, our analysts, when we do the stress test of the structure and we stress that's the price of the commercial real estate market, even in extreme circumstances, the senior parts of the capital structure is going to have very limited or no losses. When you combine these with the valuation, which is extremely attractive. Here we are talking about yield between 9 and 12% for senior part of the capital structure for rating for whatever matters of a Double-A to single-A rated issue is definitely an attractive asset class. But the point again, I like we explore all the broad credit spectrum today. You can find really opportunity across the broad credit spectrum in fixed income. So, you don't need to concentrate your risk. Usually say you have the luxury to that to diversify without sacrificing bond yield.

Mario Gonzalez Perez: Thank you so much for that Flavio. You talk about dispersion in the market and the importance of active management in the current market context and at Capital we are lucky to be one of the largest fixed income companies in the world as we know and having over 200 investment group members to really be able to tap opportunities wherever they are globally. So, we talk a lot about opportunities in the fixed income space, but what about risk? You know, what are the key risks that we are monitoring for 2024?

Flavio Carpenzano: Yeah, sure. And Rob, in a way, touched on the risk for the fixed income market. I would say that the one which is the main risk is quite extreme, more like a tail would be like a reacceleration of inflation and central bank continue to hike rates more so like a scenario similar to 2022. This is quite a tail event. I would say. We attach low probability, but still, something to keep an eye if you move more into the baseline. And that's why, Rob, in a way summarised these quite well. One is this concept of actually central bank keeping rates higher for longer. So, the market is already pricing in quite significant cut, and this might not happen, which is linked to the second aspect. Inflation might be stickier than the market expected. And then ultimately these will create more pressure in rates particular in the long end with the market asking for a higher than premium. So, the pressure on yield might still remain quite high. In particular, if you combine with the other point that we mentioned about government spending. So, if you continue to see more government intervention, government spending and more supply in the government, you will continue to see these pressure on rates, which at the moment the market is not pricing correctly. Having said that, when you bring back to the fixed income over the long-term still remains a no brainer. You lock in this high level of yield for longer. So, if you can digest higher volatility, this is still a very good opportunity in the short term, even if you move in the higher for longer camp. Yeah, volatility may still remain high, but you basically take the carry of the portfolio in case you're moving to recession, you will have yes, actually central bank cutting rates and you have a price appreciation in particular more in the high quality. So, in a way, I would say overall fixed income price, probably most of the downside or however uncertainty still remains. And that's why, again, more a flexible and active approach is absolutely crucial in this environment.

Mario Gonzalez Perez: So fair to say, I think that fixed income remains a very strong and very attractive opportunity in most scenarios, even those that have less probability, it's better for those that have a more mid to long-term. So, if like investment horizon over 3 or 5 years, you know the math as you said.

Flavio Carpenzano: Absolutely. I had another point. Again, this goes to multi-sector fixed income becomes absolutely important. We heard a lot of clients be very negative. For example, on high yield this year it was probably not the best decision to have zero high yield. So really be diversified because actually the environment is definitely more complex and requires these more balance in the portfolio construction. And again, today we have the luxury to diversify without sacrificing the heat. That would be the main message for 2024.

Mario Gonzalez Perez: And so that agility and that flexibility to be able to allocate in different parts of the market with it with limits, of course, that's something that it will be important for 2024 and beyond. Thank you for that, Flavio. And Katharine, I think if we look back in ten years’ time to 2023, probably we will remember that 2023 was the year of artificial intelligence. You know, Chat GPT, now everyone knows about that technology and the market loves all these acronyms. So, you know, this Magnificent Seven that we have been talking about for the last few months. So, I guess the question is, what are our views of this narrowness of the market? Do we feel that it's here to stay or do we feel that, you know, there are more opportunities here across in different sectors of the economy as well? 

Katharine Dryer: I mean, it has been an incredibly narrow market. I think latest numbers, it's about 72% of US returns have come from the Magnificent Seven this year. And it's the most concentrated market that we've seen in about 20 years. And I think an important thing to bear in mind is that historically, where the market has become very narrow, actually, that has tended to be a bit of a prelude to a much broader market performance. So, if you look at historical incidents of that over the next one year after you've seen a very narrow market, the typical return has been about 17% for equities. So, although we've been through this narrow phase, our expectation is that it will broaden out. The market's likely to remain choppy, but we do expect to see more breadth in terms of the leaders, and we expect to see the market be a little bit more desynchronised in terms of regional trends and sector specific trends. It's quite interesting looking at a number of our strategies which actually started to broaden out and even before coming into 2023 to begin to get ready for a broader market. And there are a number of areas where we're really quite excited looking forward. Just to highlight 1 or 2 of those. I would put health care there. You know, we're seeing a lot of real innovation in terms of new drugs and platform technologies that are helping to really tackle issues like obesity, diabetes, cognitive decline. So, names like Eli Lilly, Nova Nordisk, really leading in that. So that would be one area where we would expect to see the breadth and a lot of opportunity coming through. And energy transition would be another one, which has a lot of very broad implications, you know, going from raw materials and vehicles right the way through to companies that are solving issues like inefficiency of buildings. So, a lot of different ways to play that and a lot of opportunities at company specific level. And then just the ever-changing face of globalisation and opportunities as companies think about their supply chains and to build more resilience into those. So those are a couple of the areas that we see opportunity, but it really is also a market where you need to be active and deep research is what is really going to unlock those opportunities.

Mario Gonzalez Perez: That's great. It's great to hear that. You know, there's many more opportunities across different sectors. And perhaps we would be talking about the Magnificent 20 hopefully next year and beyond. On artificial intelligence specifically, I mean, it's quite difficult sometimes to differentiate between the hype and the real investment opportunity. So, I was just wondering whether you could maybe give us some so our views about how we are approaching artificial intelligence and that opportunity – is it really just on tech companies or is it across different sectors? You know how our portfolios are really exposed to the long-term opportunity of artificial intelligence.

Katharine Dryer: We really do believe that this has the potential to be one of the most transformative technologies in human history. But I think we just need to recognise that we are very, very early on in that whole journey and what we’ve been trying to do in thinking about investment opportunities is to really break it down and think about different points in the value chain, so to speak. There are lot of opportunities at the kind of compute level of things. So that’s where the semiconductors and the chip and equipment producers would really sit. And then as you move in a little bit more to think about infrastructure and software, and that’s where the large cloud computing providers would sit. So, the likes of Microsoft, who were very early in their strategic partnership with open AI, we expect to see a lot of new entrants coming into that space. So that’s one to watch and really analyse to, to identify the winners. And then finally, the, the application can just be immense, the beneficiaries of AI. And as I say, we are early and very few businesses have really sort of allowed themselves to be transformed by AI as yet. And we've been looking at a few different areas where we do see that starting to happen. And again, I would come back to health care where you can really see the scope for technology to touch so many different areas, whether it's kind of patient access, where it's development of new drugs, surgical procedures or being able to remotely monitor so many different ways in which these AI can really enable business to move forward and innovate. There are risks, and I think that's the other thing. We just need to be cognisant of risks at a macro level. In terms of employment consequences, risks of security and privacy. And as we know, the whole sort of governance framework is evolving. So just watching that as well remains incredibly important. And this is just a classic example of an area where deep, deep research is absolutely key to really understanding what's going on and picking out the winners in this sort of ever evolving and new terrain, really.

Mario Gonzalez Perez: Excellent, so clearly a very attractive, secular, long-term opportunity. But it's still early stages and the importance of that deep research to identify opportunities wherever they are. I think Rob, you mentioned before about sort of like the stimulus that the Biden administration has injected into the US economy of in, you know, over $1 trillion in sort of like in capital projects aiming to revitalise the US manufacturing sector. So that's very, very meaningful. So, Katharine, what is our view in terms of do you think this will translate into more opportunities within the US equity market as well, perhaps in parts of the economy that have been not as sort of like attractive, you know, in the past?

Katharine Dryer: Yeah. I think it's very easy to sort of get focussed on the new technologies, but we really do need the older industries to continue to grow as well in order for that to happen. If we look at Capex in the US as a percent of GDP, we are at very low levels at the moment, around 7%. And you mentioned the planned fiscal spending. We've got the Inflation Reduction Act and other infrastructure-based plans which really can be quite enormous in terms of the scope that they will bring here. And I think the market is probably slightly underestimating how transformative that can be and just how many industries it can touch. So yeah, we do see that having really quiet a wide impact across energy, air travel, rail travel, lots of different ways that we can see benefits from that. And you know, even in companies like Caterpillar, for example, and we've already seen in part some of the strong construction orders that they've experienced being supported in part by these fiscal measures. So really helping to lend support and create, you know, growth out of some industries that have been quite sleepy, really. So, yes, it's going to be an important driver.

Mario Gonzalez Perez: Perfect. Excellent thank you for that. And we touched on innovation. I think in the last few minutes, you mentioned Novo as one of those companies that are benefiting from a lot of innovation, both from the health care sector, but also in the technology sector and incorporated that as part of their business model. So, when we talk about innovation, traditionally in the last decade or so, perhaps even the last couple of decades, which has been pretty much a monopoly for the US. So, do you feel now that they are more European, sort of like companies that are taking the lead? Also, when we talk about innovation, do you feel that Europe could become an engine of innovation for the global economy?

Katharine Dryer: We are seeing a lot of really good opportunities in Europe. And whether you're in the pessimistic camp or the more constructive camp from the macro perspective, when you actually break it down to company specifics, we're finding multinational companies that are really embedding innovation in the way that they operate. And we've provided here just three examples of that in AstraZeneca, Sikka and Safran from three quite different industries in in each of these cases, the percentage revenue outside of Europe is high. And you can see innovation really helping to drive growth, whether that's through AI, reducing drug manufacturing time, whether it is through recycling processes or whether it's through more efficiency in terms of fuel and very different ways across different sectors in which innovation is really driving things going forward. So yeah, lots of opportunity and many other sectors as well, sort of luxury goods, IT leaders as well. So, it's about some digging in beneath the macro and finding these individual company opportunities.

Mario Gonzalez Perez: And I think it's fair to say that we, our equity portfolios have been exposed to some of these European opportunities. So, we touch on China from our perspective and Rob mentioned that we are still conservative. We position on China and clearly, you know, China is not going to have the same role as it had in previous crisis. We touch on the opportunity from an emerging market debt perspective or in that space. So, from an equity perspective, do we feel that this is still opportunity in emerging markets, even with a China perhaps with a more muted growth?

Katharine Dryer: We have been cautious on China and that was definitely the right thing to have done. You know, looking forward, I would want to say that we do still see opportunities there were in high end manufacturing and technology. So still seeing opportunity at the individual company level. I think Flavio uncovered a lot of the kind of very strong fundamental reasons for investing in emerging markets, which obviously translate through to equities as well, and a lot of goods more and more long-term trends that we can benefit from. So, for example, the emerging middle class, which is helping to boost travel and resulting in a demand also for better health care. And you've also got the very young demographic that you see across emerging market, which just helps to drive growth. So, a lot of those fundamental and structural trends translate into broad optimism. India is one where we are we see a lot of opportunity at the moment and technology would be an obvious sector there that is helping to drive that. And in terms of near shoring countries like Mexico offering some quite good opportunities in real estate or in infrastructure sectors as well. So really digging deep into those at country level to broaden out the exposures that we're taking.

Mario Gonzalez Perez: Excellent, thank you for that Katharine. So I think it's fair to say that given the uncertainty, the volatility in the markets and, you know, from a macro perspective as well, investors are really very much willing to building all weather portfolios that, you know, clearly can be exposed to growth opportunities, but at the same time can be resilient in a, you know, in a volatile environment. So, I think in this context, dividend paying components are very important. One of our portfolio managers, Karen Rundell, mentioned that, you know, we might be entering the decade of dividend paying companies. So, what are our thoughts on this part of the market? Do we feel that, you know, they're still relevant in this current environment?

Katharine Dryer: I mean, it's obviously been a more challenging year this 2023 for dividend paying strategies. But if you look back to 2022, you know, you really did see more the environment where it came to the fore. And as you say, it just helps to build resilience into portfolios when you focus on finding companies with an attractive yield and the ability to sustain or even grow the dividends over time. And one of the things our analysts and investors are very focussed on when they meet with companies is really assessing both that ability, but also the willingness to pay dividends and be shareholder friendly in the way that they're operating. It's also a space where you really can see global opportunities. So over 600 companies outside of the US that have a yield between 3 to 6%. So, it lends itself to a very global approach. So important to think if we think about diversification from an equity perspective, to think about diversification as of style as well as geography.

Mario Gonzalez Perez: Excellent. Japan, I think it's fair to say it has been a very positive surprise this year for the markets that we have the topics, you know, over 25% year to date. We have inflation back to the Japanese economy, attractive valuations, better corporate governance. So, against this backdrop, do we feel that Japan now is becoming, again, like a very attractive opportunity for global investors?

Katharine Dryer: Yeah. I mean, it has been a good year and we continue to see opportunity here. We think valuations are still attractive and you can create a positive macro case for investing in Japan. But I think the interesting thing at the moment is really what we're seeing is a very genuine change in corporate behaviours. We began that journey with Abenomics, but it feels as if that's just got a bit more momentum to it now. And the Tokyo Stock Exchange has put in measures to really make sure that companies are not sitting with idle cash on the balance sheet and are really focusing on profitability and shareholder returns and official measures as well to encourage M&A. One of the areas that they've focussed on in particular is companies where the price to book is below one. And if you just compare the percentage of the Japanese market, percentage of the topics where that is the case, which is around 39% today with a similar number in the US of 5%, you see how much scope there is there. And if we did see this focus on changing behaviours extend beyond the one level to two companies with a price to book slightly above that. That could really be transformative. Our analysts have been in to see over 100 companies in Japan this year and we're really seeing evidence of a clear change in behaviours to be more focussed on generating returns for shareholders.

Mario Gonzalez Perez: I think Japan is a very good example of the added value of having on the ground research and global research as well. In that particular asset class, and I think at Capital, we are very lucky to have been one of the first global asset managers having presence in in Japan. You know, since the 1980s, we have increased our team investment team as well in the in the region. So, we have talked about a lot of opportunities. We talk about innovation, artificial intelligence, how the market, you know, is broad enough and, you know, offering opportunities across different sectors. We talk about selectively emerging markets, you know, becoming attractive. We have also this come out about Japan. So, a lot of opportunities. But of course, there are a lot of risks as well. So which ones are the ones that you would like to highlight for 2024, for which ones are the highest priority for us when we when we think about the year to come.

Katharine Dryer: You know, it's not often that you get complete alignment between your fixed income and your equity voice, but I do think the big risks are the macro ones. And the thing that would be the real challenge for the equity market would be if we do see a reacceleration in inflation. That's the thing that would be quite, quite difficult to navigate. I think otherwise, just looking at geopolitics and the potential for an escalation of some of the conflict that we're seeing, there would be the other the other big worry and as Robert says, the implications that could have on commodity commodities and other areas, maybe just add from a macro point of view and again, agreeing with Flavio, just that the risk that central banks stay too tight for too long and just to put downward pressure on growth would be the other the other concern So yeah agreement with you that it's really those macro risks that we worry most about at the moment.

Mario Gonzalez Perez: Excellent. Thank you so much for that, Katharine. So, I guess before we wrap up, I'm going to give you a little challenge about if you can give me a summary of your macro views, fixed income and equity. I know it’s going to be quite challenging, but let’s have a try. So, Rob perhaps are we going to start with you? What would be your thirty second summary of the macro self like a prospectus for the new year?

Robert Lind: Well, I think echoing what Flavio said, I would suggest that it's going to be something along the lines of persistent inflation, likely delays, rate cuts in 2024.

Mario Gonzalez Perez: Perfect. That's a good one. Flavio, what would be your summary for the fixed income markets?

Flavio Carpenzano: My tagline would be like just as a reminder, fixed income markets in a boring way is math. And so, the yield is just a proxy for your future total return. And so today you can look at this high level of Q for longer. And that's why from that perspective, fixed income markets have become extremely attractive. However, again, the risk remains, uncertainty remain. And so really be nimble, diversified and think about really portfolio construction. That would be my key takeaway.

Mario Gonzalez Perez: Excellent. Thank you so much for that. Katharine, equity markets?

Katharine Dryer: So, I think looking forward, a more positive outlook for earnings growth and a broader market with opportunities across geographies and across sectors, across styles, but also an environment where you really need to be active. And the research that you do at company level is really what's going to enable us to unlock that value.

Mario Gonzalez Perez: Excellent. Well, thank you so much. I think it's time to wrap up.

Closing disclosure

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