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Investment Monthly

Policy pivots?
03 January 2024
    Articles
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    Key takeaways

    • Our preference is for defensive positioning in investment portfolios. Despite bullish pricing in equity markets, a weaker economy and disinflation should be supportive for government bonds and challenging for stocks
    • 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 some firms, so we maintain a bias to quality and selectivity in stocks and credits, with areas of IG credit offering equity-like returns for bond-like risk

    Macro Outlook

    • Disinflation continues to trend lower in developed economies, but areas of ‘sticky’ inflation will persist. The golden path to a soft economic landing in the US is possible, but economic headwinds are strengthening
    • US economic activity has been resilient, but excess consumer savings are depleting, and labour markets show signs of weakness. Eurozone activity is in worse shape, while Asia is seeing lacklustre growth, especially in China
    • Our base case is that the US and European economies will see weaker growth in 2024 as higher interest rates bite. But there are areas of strength, especially in emerging markets, with India well-positioned to perform well

    Policy Outlook

    • The Fed has abandoned its bias to hike and pivoted towards rate cuts in 2024. Eurozone and UK policymakers have been more guarded in their outlooks, but they are both expected to ease policy in 2024
    • In developed markets, we believe the path to painless disinflation via ‘the golden path’ is still tricky given weakening economic signals. In China, 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

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