Investment Monthly
Broad-based rally
05 December 2023
Key takeaways
- Markets continue to price-in an optimistic outlook despite indications of an elevated risk of recession and further disinflation over the next 12 months. We prefer a more defensive positioning for portfolios
- Generally, we see good opportunities in selective areas of global fixed income. We think “bonds are back” and that a higher term premium means that that duration risk is being rewarded again
- A weaker outlook for earnings growth could compromise stocks, but robust balance sheets mean that investment grade credit is an interesting option for investors looking for equity-like returns for bond-like risk
Macro Outlook
- Disinflation continues in developed economies and should persist in 2024 despite areas of ‘sticky’ inflation. Weaker demand and economic growth will lead central banks to begin cutting rates from Q2 2024
- US economic activity has been resilient, and corporate earnings have held up, but excess consumer savings are dwindling. Eurozone activity is in worse shape, while Asia is seeing lacklustre growth, especially in China
- Our central scenario is that the US and European economies will see weaker growth in 2024 as higher interest rate bite. But there are areas of strength, with India well-positioned to perform despite global headwinds
Policy Outlook
- With central banks now at the end of the policy tightening cycle, attention turns to future rate cuts. While policymakers have not signalled any urgency to ease rates, weaker economic conditions could force their hand
- We believe central bankers will have to ease policy by more than markets currently expect during 2024. In China, targeted policy support is expected to expand as officials step in to stimulate growth
- We think we are embarking on a new economic regime that will see 2 per cent inflation become more of a floor than a ceiling, and fiscal policy play a more important role in economies, leading to higher inflation and interest rates