Please ensure Javascript is enabled for purposes of website accessibility Pivotal moments

At BNY Mellon Investment Management’s European Investment Conference 2024, economists and portfolio managers from across the group shared ‘pivotal moments’ in recent years and discussed some of today’s key macroeconomic and market trends.

Return to the ‘old normal’

“2024 is a pivotal year. It is the year we can look back and say the period of zero interest rates, between 2008 and 2020, is now behind us. That was an abnormal period. We have returned to an ‘old normal’ world, forgotten for the past 12 years, and we think higher real interest rates are here to stay.

“This year could also be pivotal in terms of how central banks react to inflation. It is not a done deal that inflation will fall back to target, and it may take longer than markets think. The ‘everything rally’ seen in January and February of 2024 was a symptom of the market being too optimistic on the speed of interest rate cuts going forward.

“We think this pivotal moment is best represented by forward expected returns from fixed income. Higher interest rates have pushed bond yields up, meaning investors finally stand to receive an income from fixed income. That hasn’t been the case for the past 10-15 years. Plus, over the long term, fixed income returns tend to be dominated by the income component as opposed to the month-to-month or year-to-year capital variation.



BNY Mellon Investment Management chief economist Shamik Dhar

“In a higher rate environment, fixed income should be a better hedge in portfolios. If equities don’t perform well, higher yields on fixed income assets could offset that. We think multi-asset portfolio managers should be considering this looking ahead.”







Newton1 global income portfolio manager Jon Bell


A change in equity market leadership?

“We are at a pivotal moment for central banks. Should they cut interest rates? What does this mean for leadership in equity markets?

“We think in the current environment it is hard to believe central banks will aggressively cut interest rates. Two macro themes of big government and great power competition are at play, and both are inflationary. We see examples of these themes in action through central bank intervention, Covid lockdowns, and the influence on energy and food prices. Then there is the battle between liberal democracies and autocracies, the tech war, and conflicts in Ukraine and the Middle East.

“In our view, the might of these themes outweighs global disinflationary forces at play such as challenged demographics, high levels of debt and technological disruption. As such, we think the inflation genie has been released from its lamp.

“We had a long period after the financial crisis characterised by quantitative easing and lower interest rates that was good for growth stocks but not so good for dividends. But that era of ‘free money’ is over. The return to a more normal economic environment, we think, could prompt change in equity market leadership.

“For one thing, dividends become more significant to returns in an environment of higher interest rates. Dividend returns tend to be less volatile than capital returns and what’s more, the compounding of dividends is key to long-term equity returns.

“The importance of dividends has been evident when growth stock bubbles have burst, such as in 1930 after the stock market crash of 1929 and in the 2000s. Also, in the 1970s, the last time that inflation was a significant factor in economies. The pivot away from ‘free money’ could change leadership in equity markets and we think it’s likely we’ll reflect on the 2020s as a decade when dividends were critical to returns.”  





When transitory became transitory

“For me, the biggest pivotal moment in the last 10 years was in late October 2021 when Federal Reserve chairman Jay Powell accepted that higher inflation was not ‘transitory’. From then short-term interest rates moved up significantly. This returned us to a more normal interest rate environment compared with the post global financial crisis (GFC) period.

“But in 2021, before Powell’s comments, companies were telling us they were raising prices because costs were moving higher. We could see then that inflation was not going to be transitory.

“I have a strong belief that you should throw away the playbook for what happened over the 10 years since the GFC. That is not what is likely to happen over the next 10, even 20, years.



Newton US equity income portfolio manager John Bailer

“What happens to certain companies in a more inflationary environment? As Warren Buffett once said: ‘Only when the tide goes out, do you discover who has been swimming naked’. You saw that in early 2023 when the higher interest rate environment hit certain US regional banks. We think more companies could come unstuck, especially those that benefitted from so-called free money. 

“When the S&P 500 gets overvalued or undervalued it has nothing to do with the cheapest stocks – they are always cheap – it has to do with the most expensive. When the most expensive group widen out from the cheapest, we argue it is worth focusing on potential multiple compression versus earnings growth. That is why we look for companies with good intrinsic value, improving business momentum and strong fundamentals.”






Walter Scott investment manager Alan Edington


Seeking quality in a changing world

“According to the artificial intelligence (AI ) chatbot ChatGPT, the pivotal issues in equity markets today are geopolitical shifts, technological advancements, rates, inflation, trade disruption, environmental issues and regulation.

“Inflation has been sticky and interest rates are likely to be higher for longer. There are signs the post-Covid consumption boom could slow, for example credit card delinquencies ticking higher.

“There is no doubt AI will drive earnings growth for lots of businesses over time. We see AI opportunities in the areas of healthcare, automation, and search and advertising among others.

“Elsewhere, geopolitical shifts and trade disruption dominate headlines. Semiconductors offer an interesting case study in this area. China and the US are trying to diverge, and certain countries are spending meaningfully to gain independence in the race around semiconductors.

“If markets are pivoting, if the world is changing, what sort of companies should we invest in? We think earnings growth drives share prices over time – as long as you don’t pay too much. Trying to time when pivots and issues will appear or how they will affect economies and markets is impossible. 

“Therefore, we look for companies where earnings growth is not going to be disrupted by the various pivots and issues in markets and where companies can benefit from secular growth trends. This means investing for the long term with exposure to highly profitable companies with pricing power and strong balance sheets.”


Surprising economic resilience

“If you landed from space and someone told you inflation had been in double digits and interest rates had gone up almost 500 basis points in certain countries, you would expect economies to be in bad shape.

“But when we look at the global economy, we see an improving situation. We have been seeing reasonable levels of nominal growth and in this environment, companies can normally come up with enough cash to pay their coupon.

“I think central banks are thinking what in the world is going on – is growth speeding up or slowing down? The answer is a bit of both and that makes it an interesting picture for managing money.

“Companies have been smart – they’ve paid down debt and avoided issuing long-dated bonds, choosing to wait for the possibility of lower interest rates to reduce the coupon. Interestingly, we have not seen higher levels of defaults. Companies can go outside of banks to get money such as private credit and private equity markets. 



Insight Investment head of fixed income specialists April LaRusse

“We look where a region or sector has been beaten up and look for opportunities in that stress. We see positive momentum in markets, and we think credit spreads are going to narrow. Some of that is coming from the fact that the economic environment seems to be improving and some from the fact that interest rates are on a downward trajectory.” 







Insight Investment senior high yield portfolio manager Uli Gerhard


Low defaults in high yield

“With high yield it is important to be global in outlook because there are certain sectors we don’t want to buy. If you look at default statistics, we have seen very few defaults. We tend to have defaults when something extraordinary happens in the market: in 2020, we had Covid-19 which presented a major challenge. But most of the time, if investors pick the right companies, they should be OK.

“Economists will always tell you when bank lending tightens defaults go up. But that correlation doesn’t work anymore. Why? There is a very simple explanation: private credit. It is as big as the high yield bond market. If companies need capital, they go there. But be aware that when you invest in private credit, you’d better know what you are buying. We think defaults could come down the pipe.

“For most companies profit margins are decent right now. Over the years they have been growing because high yield companies have become more disciplined. Companies which were once largely small are, in many cases, no longer that small. Leverage has declined and companies have been paying down debt. 

“Investment grade leverage has increased over the recent period, while high yield leverage has declined. That is perhaps another reason why high yield spreads should be tighter today compared to where they were 10 years ago.”



Making an impact through bonds

“Record high temperatures, widespread flooding, significant social unrest, a global pandemic, wars and rumours of wars. The past five years have been tumultuous; the next five possibly even more so. We are a long way from environmental sustainability, social inclusivity, and communal prosperity.

“Around 600 million people worldwide subsist on less than US$2.15 a day2. Some 2.2 billion people have no access to safe drinking water3. Half of the world’s urban population have no convenient access to trains or buses4. Just over 80% of world energy supply comes from fossil fuels5.

“And the vast majority of each of those challenges are found in emerging markets (EMs), home to 85% of the world’s population6. Whether you are looking at scale of potential impact, or the scope for positive change, EM is unparalleled.

“The needs are across all 17 of the UN Sustainable Development Goals (SDGs).  Over the next three to five years, we think there are two particularly compelling opportunities in building out affordable renewable energy across EMs and building out telecommunications connectivity, particularly in sub-Saharan Africa. As those projects are completed, we expect new, exciting impact opportunities to arise, helping to drive progress towards meeting more of the SDGs.



Insight Investment emerging market fixed income portfolio manager Simon Cooke

“There are over US$370bn in hard currency impact bonds in EMs and we expect that to exceed US$500bn in the next couple of years, with more and more innovation in the type of impact achieved7.”




Insight Investment portfolio manager Shaun Casey


Banking on credit

“We can see a path for credit continuing to perform very well, particularly in areas such as investment grade (IG), in the coming months and quarters. We are seeing numerous investors coming into the asset class who haven’t been involved in fixed income for the last decade.

“If you look at some of the yields on credit, we believe we are seeing some of the best opportunities in over a decade, with yields having spiked considerably higher in the last two years. For bond investors, the additional compensation you receive for owning credit over government bonds can be a key factor in any underlying investment decision.

“The banking sector offers some strong potential credit opportunity. Despite some high-profile problems in banking last year, particularly among some smaller US regional banks, we don’t feel these were systemic so much as down to short-term management problems. In our view financial regulators have, on the whole, done a good job since the financial crisis in terms of making banking safer and less risk prone. The sector could therefore offer significant value to select investors.

“Elsewhere, many companies saw their balance sheets temporarily impaired due to the impact of the pandemic and this prompted an upward spike in the number of ‘fallen angels’ in 2020. Many of those issuers are now finding themselves on a firmer financial footing, returning to IG classification from high yield. If, as an investor, you can identify those companies then investment in them could potentially become a valuable source of alpha generation.”




The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.

1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.
2 Accessed 19 March 2024.
3 Updated July 2023. Accessed 19 March 2024.
4 Based on 2019 data. Accessed 19 March 2024.
5 International Energy Association. 24 October 2023
6 Accessed 19 March 2024.
7 Insight and Bloomberg as at December 2023. For illustrative purposes only.
1844852 Exp: 24 September 2024