Mackenzie Minute: September 7, 2018
James Morrison, Associate Portfolio Manager, Mackenzie Ivy Team, underscores the importance of investing in high-quality businesses with strong balance sheets when interest rates start to rise in a world awash of debt .
JAMES MORRISON: We are finally starting to see central banks head down the path towards normalizing interest rates. Cheap debt for ten years has artificially driven growth and resulted in record debt levels which has inflated asset values and weakened the global economy’s ability to withstand disruptive events. This combination of economic risk and elevated valuations warrants caution and underscores the importance of the Ivy tenets of investing in high quality businesses with strong balance sheet while being disciplined on price.
Well, the path that interest rates take has broad implications for the markets. Think of the central banks approach to managing interest rates as a tight rope act where the height of the rope is valuation risk and the safety net is a strong balance sheet. In our view, the rope is very high today and there is no safety net because we have taken on way too much debt and flooded the market with capital. So today, the central banks face a tough choice. They can be careful and move slowly with rates, which actually increases the chances that they will still be on the rope when a negative shock like a trade war occurs, or they can go quickly and hope that they don’t trip and fall, sending the economy into a recession.
We don’t know whether the rates will move fast or slow, but either route is risky, so we need to be careful. And Ivy’s objective is to outperform over a full market cycle so being careful means that if the markets continue to run, we are going to participate, but at a lesser extent so that we can continue to protect our clients’ capital through a downturn.