Introduction
An unusual cycle ends with a strong market rally. 2023 ended on a sharp rally by nearly all asset classes which made good much of the decline seen in 2022. Underpinning these gains are hopes for big central bank rate cuts in 2024. Evidently, investors believe the worst period of inflation is now behind us and price pressures and monetary policy are moving back toward some kind of “normal”.
At the same time, economies continue to show proof of resilience, most obviously in buoyant job markets while resorbing the excess savings – one of the key characteristics of this unusual cycle. We agree with investors that the end of this unusual cycle is near. Inflation is retreating and central bank rates are approaching their pivot points. Nonetheless, we remain cautious about how quickly we will get back to normal. Progress could be quite gradual.
What is more, we may be dealing with a new normal for some time to come. The structural factors of recent years – e.g., deglobalisation and a path to net zero - remain in play and will continue to affect growth and inflation going forward.
We remain Overweight bond markets and US equities. We retain a highly diverse global positioning, which has allowed us to catch the rally in equities while retaining protection against any correction. We maintain our preference for the US equity market, which should continue to benefit from a resilient economy. In contrast, we are Underweight Emerging Markets as investors are showing a lasting reluctance to return to the Chinese equity market. Meanwhile, we remain Overweight bond markets, particularly Investment Grade corporate bonds.The looming pivot by central banks makes corporate debt especially attractive, notably as a means to lock in today's yields. Moreover, defaults by highly-rated companies remain rare with most still sitting on solid balance sheets.
In accordance with the regulations in force, we inform the reader that this document is qualified as a promotional document. Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 12/01/24, publication completion date.