UBP House View - February 2024

Key takeaways

Editorial

Inflation and interest rates up: 2022 and 2023 will certainly leave their mark in the annals of economic history. However, as price increases abate and interest rates normalise, fundamentals are once again starting to recover, as confirmed by the rally in November and December 2023.

The theme for the coming months will therefore be one of asynchronous economic growth, with different regions showing significant divergences.

We are maintaining our conviction on the United States over Europe given the former’s indexes’ tech bias, whereas the latter is bogged down in economic and social issues. In Asia, we favour India’s market dynamic over China’s, which lacks visibility despite monetary stimulus packages and remains the greatest loser of the 2023 financial year.

At the same time, the US electoral calendar promises a positive year for the country’s stock market, as the economy takes its place at the top of the agenda. Historically, US presidential elections have always led to an increase in volatility.

The return of market fundamentals will lead to positive performances across all asset classes. Against this backdrop, balanced portfolios remain attractive, leading to a window of opportunity for investments, as long as regions are carefully selected.

Strategy

Positioning as the soft landing takes shape

With the US macro backdrop playing out as expected – falling inflation paired with still-firm growth –, American equities have rallied while bonds have marked time, as expected, at the start of 2024.

Historically high US equity valuations and 10-year US Treasury yields below the 4.5% target outlined in our 2024 Investment Outlook are understandably leaving investors cautious about chasing the rally from the October 2023.

However, strong data from the ISM and on the US job market in January have added to evidence that the industrial slowdown in the US economy may have in fact troughed and begun to rebound as the new year begins.

This suggests that the earnings recession of 2023 may also be at an end. Investors can therefore look forward to an earnings re-acceleration in the coming quarters. This should help to drive an earnings-driven leg as stock markets price in a broader earnings trough beyond the technology sector moving into mid-year.

As this transition in equity market drivers unfolds, volatility will undoubtedly pick up. However, medium-term investors can use any such volatility to reposition portfolios for the earnings growth phase ahead.

Outside the US, investors can look to the reform- and restructuring-driven earnings growth in Japan and earnings growth driven by the repositioning of global manufacturing in China to India and Mexico as non-cyclical earnings drivers looking ahead, much as was seen when US manufacturing capacity was shifted to China in the 1990s and 2000s.

In fixed income, a still-inverted US yield curve poses a risk to full-duration exposure. As the soft landing materialises, longer-dated yields may fall more modestly than moderate and short-duration yields to finally normalise the yield curve after nearly two years of inversion.

However, fixed-income exposures can still serve as a cushion for balanced portfolios. Moderate-duration credit should remain well bid, as a recovering US economy should keep (admittedly cyclically) tight spreads contained. Moreover, deployment of cash into moderate-duration credit can help lock in yields as central banks begin rate-cutting cycles moving through mid-year.

For more detailed insight, download the full UBP House View.