LGT Private Banking House View

March 2024 - in a nutshell

In this month's House View, we review some of our "Outlook 2024" forecasts and take a look at the latest developments in the financial markets.In our Macro article, we discuss the challenges faced by the manufacturing sector in recent years, highlight the factors behind this development and share our outlook for this part of the economy.We also take a look at the outlook for US technology and Chinese equities, and review our positive view on bond proxies.

Gérald Moser, CIO & Head Investment Services Europe
Reading time
7 minutes
House View March Global Manufacturing
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In this month’s House View, we are reviewing some of our "Outlook 2024" predictions and have a look at the latest developments in financial markets.

In our macro article, we discuss the challenges faced by the manufacturing sector in recent years. The decline in economic sentiment and manufacturing PMIs (Purchasing Managers’ Indices) has been severe, particularly in Europe. We highlight the factors behind this development and share our outlook for this part of the economy.

An improvement in the manufacturing sector, albeit from a low base, would be a welcome sign for equity markets, particularly the S&P 500, which is currently unusually dependent on the technology segment. The US technology sector has been the strongest driver of the S&P 500, with a few top stocks accounting for a significant portion of the sector’s performance. At the other end of the performance spectrum, Chinese equities have been the largest consensus underweight, but have recently shown some signs of life, breaking out of a downtrend channel. We discuss the outlook for both US technology and Chinese equities and review our positive view on "bond proxies", first mentioned in our "Outlook 2024".

In our investment strategy, we assess two of our convictions from the 2024 annual outlook report. The first belief was that growth would become the main driver of risk assets, overtaking returns. The second was that fixed-income markets would not experience another year of low returns. We remain convinced that both of our convictions will come true in 2024. 

Speaking of fixed-income markets, we put the recent resurgence of banking stress into perspective with the apparent calm in international bond markets. For now, the market seems to view these events as isolated and continues to focus on the robust US economy. We also add our thoughts on the recent reassessment of central banks’ monetary policy, which is now much closer to our own forecasts.

Finally, in our currency view, we look at the Swiss franc and the Swiss National Bank’s shift in currency intervention. The SNB has taken a very pragmatic approach to its currency management, with a recent focus on the negative implications of a strong real effective exchange rate for the Swiss economy.

Macroeconomic environment

Global manufacturing sentiment witnessed a sharp two-year decline, with Europe experiencing a more severe and prolonged downturn than the US, as the industry faces both cyclical downturns and long-term structural challenges. Weak manufacturing growth results from high global interest rates, concerns over economic growth, and a considerable list of external headwinds impacting capital-intense business models. Meanwhile, the industrial sector shows signs of a hesitant stabilisation with relative improvements in stock market valuations and a recovery in optimism, underpinned by tentative signs of a stabilisation of sentiment.

Investment strategy

In our annual Outlook report released early December, we had highlighted four convictions for 2024: 1) growth will overtake yields as the main driver for risky assets, 2) fixed-income markets are unlikely to experience another year of low returns, 3) geopolitics will remain in the spotlight, and 4) uncorrelated assets will continue to be important to diversify a portfolio. Three months after publishing our convictions, we want to take the opportunitiy to make a first assessment on the first two statements as those can directly be observed in current market developments.

Equity strategy

In the US, industrial activity is showing signs of stabilising, while leading indicators in the euro-area manufacturing sector, the UK and Japan remain in recessionary territory. Meanwhile, the global industrial sector is already pricing in a solid recovery in the manufacturing sector, but it seems that these expectations are running a little too far ahead of reality. On the other hand, the defensive, qualitatively more stable sectors with above-average dividends - pharmaceuticals, consumer staples and utilities - which are regarded as "bond proxies", are boasting positive earnings expectations for the current year at valuations below the global equity index, which, in combination with expected interest rate cuts later in the year, should offer rerating potential. Finally, if we shift the focus to the east, Chinese equities lost 45% of their value between 2020 and 2024 and valuations and sentiment are depressed. Interestingly, Chinese equities have started to show signs of life on expectations of more concerted policy action. For investors with a high risk tolerance, Chinese equities may pose a tactical buying opportunity.

Fixed-income strategy

While credit risk premiums are moving in line with US economic data, the situation regarding key interest rates is much more volatile. Expectations of interest rate cuts by the end of 2024 have turned out to be too optimistic, or in other words too aggressive, as the market reaction over the past month has shown. Dovish market sentiment seems to have peaked and the narrative of high policy rates remaining at these levels for longer than usual is back. As we pointed out in early December, we believe that a rapid and significant easing of monetary policy is only likely in a recessionary environment. We therefore expect the ECB to kick-start a decisive cycle of monetary easing with a first step, while the Fed can afford to be more gradual given the strong economic data.

Currency strategy

The Swiss National Bank (SNB) played a key role in supporting the Swiss franc in 2023, but as the year unfolded, there was a noticeable shift in its strategy. Initially, the SNB actively purchased francs to combat inflation, but later, the focus moved towards addressing the challenges posed by a strong real effective exchange rate on the Swiss economy. The SNB’s evolving stance highlights a pivot in its approach to FX interventions, acknowledging their importance in maintaining economic stability and adjusting its actions to mitigate the negative impacts of currency strength, with evidence suggesting market interventions to manage the Swiss franc’s value.

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