 Wolf Von Rotberg |
We will have to be selective in 2024, with winners who will not be the same as in 2023. We need to be able to seize opportunities in a very attractive bond market, keep an eye on gold and, above all, avoid the false good ideas of 2023.
In 2024, analysts will be focusing their attention on the fall in interest rates, and how soon and to what extent it will begin. While rates and yields have risen significantly for much of 2023, the opposite is likely to happen this year as inflation recedes.
"We maintain a positive outlook for fixed income in 2024. Valuations are attractive, much better than in the equity market, which has already incorporated a lot of good things. With interest rates at high levels, the monetary stance of central banks over the next few months will be to lower them, helped by falling inflation and an economic outlook that is at best stable or worsening," explains Wolf Von Rotberg, Economic & Equity Research at Bank J Safra Sarasin, who continues: "Bond yields are likely to slide over the next few months, with the promise of good returns for bond investors, with a preference for investment-grade securities (minimum BBB) rather than high-yield securities" The current level of yields should also provide a sufficient cushion to absorb any erratic movements in the bond market.
The surprise of the US economy
In the United States, the big surprise of 2023 was the continuing strength of the economy. Throughout the year, the strength of growth defied the Cassandras, with quarter-on-quarter revisions upwards. At the start of this year, the US economy is still running at full speed, much more so than forecast by economic forecasters. But there's a risk of the engine jamming this time.
With a buoyant labour market, American consumers contributed 60% of the growth figure, with travel, services (cinemas, leisure activities, etc.) and public spending providing around 30%. In this atmosphere, the US central bank is continuing its fight against inflation. With a dynamic job market that is sometimes in short supply, there is still upward pressure on salaries. Business owners are obliged to pass on these spiralling wage costs in their selling prices, automatically pushing up inflation. As a result, the US central bank would like to see tensions on the labour market ease and cool the economy a little.
Recession in sight
While public spending has contributed to Uncle Sam's strong growth, it has also increased the deficit and remains a black spot in the US economy, with public debt and deficit spiralling out of control. This expenditure cannot be sustained over time.
In other words, with a labour market that the Federal Reserve would like to see cool and a brake on public spending, Wolf Von Rotberg is betting on the economy entering recession rather than a soft landing. Moreover, if the statistics are anything to go by, it is very rare for growth in the US economy to withstand a series of monetary tightenings. Since 1990, during five sequences of rate rises, the economy has escaped recession only once (1995-1998).
Another early sign of the slowdown underway is the slowdown in credit creation. And delinquency rates on consumer and car loans have accelerated, clearly supporting the idea that this time the monetary stance is starting to bite the economy more decisively in the US.
Similarly, the rate of credit card crime has also risen over the last 12 months, reaching its highest level since 2011. In a nutshell, economic growth is likely to falter before the summer in the United States, and inflation is likely to lose momentum, both of which will encourage rate cuts.
In Europe, the story is somewhat different, with growth that has certainly been steady and positive in recent years, but insufficient to make up for the shortfall in growth accumulated after the economy was forced to come to a halt during the covid period (on the assumption that the economy maintains the growth rate of the 2015-19 period).
Consumers were the driving force behind growth in 2023, benefiting from the rise in wages, which maintained their purchasing power in the face of inflation. The deceleration in inflation is expected and hoped for by the ECB. The latest figures show that it has even begun.
The start of this downturn in price rises has improved net household income. The probable return of the Chinese economy, which is slowly emerging from a very bad patch, will provide a boost to European growth, albeit marginal, with an increase in European exports to China.
2024, the mirror image of 2023
In the world of equities, some of the stocks that lagged behind in 2023 because of rising interest rates are likely to make a comeback this year as interest rates slide. These include utilities, healthcare, commodities and even real estate. In terms of regional choices, the fall in yields on US Treasuries, as observed since 2010, has been favourable to Swiss equities, while Japanese equities have been at the opposite end of the scale. Note that in the event of a major market downturn, the US central bank has enough ammunition to restore calm to the markets. But when it comes to equities, you'll have to be patient. Prices are likely to fluctuate in undulating patterns over the next few months. The second half of the year should be more buoyant.
Return of gold
Because the great promises of AI (artificial intelligence) and the unwavering confidence of the tech giants have pushed Wall Street to ignore uncertainties about the future pace of rate cuts have pushed the market a little too fast, a little too far. Why the bond market is so attractive. On the currency markets, the dollar will come under pressure from the combination of lower key interest rates and a slowing economy. The European Central Bank's reluctance to consider rate cuts any time soon (it will wait for the first dollar rate cut before acting) will support the euro, but less than encouraging statistics on growth in euros will curb its advance. Finally, gold will find favourable ground with falling interest rates and a weaker dollar. Historically, a 1% fall in rates has led to a 15% rise in gold.
