Global growth rolls into 2024 in a sluggish pace, leaving the burden of driving market optimism to disinflation and hopes for "sooner" and "sharper" interest rate cuts. While the probability of our current "high for longer" base case has indeed receded, we still think it will take a prolonged period of monetary restrictiveness to truly fulfil central banks’ inflation mandates. We remain "Neutral" on equities and government bonds, while keeping an "Underweight" in high yield credit.
The year 2023 closed with a strong rally in equities and bonds which took many market participants by surprise, including ourselves. Lower-than-expected inflation prints both in Europe and in the United States, a Federal Reserve meeting in December with a relatively dovish stance and resilient growth led both equity and bond markets to price an almost perfect outcome: no recession and many rate cuts from central banks as inflation is swiftly back on target in 2024.
But we believe that the path towards rates’ normalisation is going to be bumpier than markets assumed in December. The latest US employment figures suggest that growth remains resilient. With inflation still not at the official target of 2%, there is little incentive for central banks to start cutting rates as early and as aggressively as capital markets are currently expecting.
In this respect, the first half of 2024 is likely to be similar to the second half of 2023: data-driven financial markets with a focus on the balance between inflation and growth, as well as ongoing issues on the geopolitical front and technicals will play a significant role, especially in fixed income markets.
In this environment, we are "Neutral" on equities and government bonds, the two largest asset classes. The rally has pushed equity valuations to stretched levels, based on earnings expectations that appear overly optimistic for the time being. We still expect economic growth to slow down and equity growth to be in the low single digits at best.
In fixed income, we continue to see high yield credit as not adequately compensating for the risks of holding it. We remain "Underweight" in this asset class. While we are tactically "Neutral" on government bonds, we are strategically positive on the asset class. We prefer long duration in this part of the fixed-income market.
On the currency side, we argue that the current weakness in the US dollar has gone too far. It would not be a surprise to see a pause and even a strengthening of the greenback in the short term. Finally, we remain "Neutral" on gold. While the precious metal should find additional support in 2024 from easing real rates and ongoing geopolitical issues, the recent strong performance suggests that a pause in gold’s performance is likely.
Global growth rolls into 2024 at a sluggish pace, leaving the burden of driving market optimism to disinflation and hopes for "sooner" and "sharper" interest rate cuts. Continuing disinflation indeed warrants some optimism that central banks might already achieve price stability sooner than feared, providing potential tailwind for risk assets over the course of 2024. While the probability of our current "high for longer" base case has indeed receded, we still think it will take a prolonged period of monetary restrictiveness to truly fulfil central banks’ inflation mandates. Major central banks will probably choose to err on the "too tight" side as long as growth - even if weak - does not collapse and unemployment dynamics stay contained.
Equity markets ended the year with a strong rally. The move was not a reflection on stronger growth, but rather a sharp repricing in interest rate expectations following lower than expected inflation prints. We remain "Neutral" on equities and government bonds, while keeping an "Underweight" in high yield credit. Short-term asset class returns are going to be very data dependent, but tactical opportunities should emerge from this volatile environment.
After the spectacular year-end rally, the equity markets start the new year with a somewhat euphoric investor sentiment, technically overbought conditions and elevated valuation multiples. Also, 2023 ended with low volatility levels, the likes of which we last saw before the pandemic. We expect the new year may start with some sort of consolidation, digesting the latest moves, which may happen either over time (trending sideways) or price (some pullback). However, at the same time, seasonality stays supportive and the key drivers for markets remain in a fragile balance between weakening growth on the one hand and a potentially more supportive monetary policy backdrop on the other. For this equity market, which is highly data dependent in the near term, we maintain an overall "Neutral" stance.
Following the sharp decline in long-term government bond yields in recent months, we believe a temporary countermovement is possible. With the exception of the high-yield segment, where we avoid the financially weakest issuers, we are currently "Neutral" in all other fixed income segments. What remains constant are our preferences within these segments. In credit, for example, we favour shorter-dated bonds from investment-grade issuers, while in government bonds we continue to focus on longer-than-average maturities.
We have correctly predicted a weaker US dollar in the fourth quarter of 2023, especially as the Japanese yen has strengthened against the greenback. Additionally, the euro rebounded nicely, exceeding our expectations. However, we believe that this upward movement might have been too rapid and we anticipate a temporary strengthening of the US dollar. We have also raised our gold price again. We believe that factors such as stable yields and geopolitical uncertainties could well support a sustained rise in gold prices.
Factors such as yield stability and geopolitical uncertainty will support sustainable gains in gold prices in our view. We have therefore raised our gold target once again. Investors widely view gold as a safe haven, and it is no surprise that the precious metal has remained an attractive asset in recent years. Global geopolitical tensions, particularly those stemming from conflicts in Ukraine and the Middle East, have heightened concerns. As a result, gold has seen a significant increase in its price since the Hamas attacks on Israel began.