© Reuters
edited by Livio Spadaro, Portfolio manager of Frame Asset Management
For the markets, soft landings are still the basic scenario but 2024 is full of pitfalls
As seen, 2024 will be a year marked by record elections that could result in a new face for the global geopolitical order. International tensions have not eased, the war in Ukraine continues even if support for Kiev loses consensus among the international community while the situation in the Gaza Strip risks degenerating. China’s aims on Taiwan are likely to continue to add fuel to the less than idyllic relations between the Dragon and the West, while in Europe the populist right could upset the traditional political structure of recent years. In fact the Geopolitics is the main concern of the markets for the current year.
However, the dynamics are similar in Germany, a country that is facing a recession that began practically with the end of relations with Russia. German industrial production has been declining continuously for 6 months now. Government support for the economy may have come to an end, especially after the German Council rejected the use of pandemic funds to fight climate change, effectively blocking €60 billion for the federal budget. The first results of the ruling are already visible given that the Scholz administration has announced a crackdown on subsidies for the agricultural sector which sparked the protest, currently still ongoing, by thousands of German farmers.
However, in addition to politics and geo-politics, the main theme of 2024 will remain the economic/financial one: what will happen to the global economy? When and how much will central banks cut interest rates?
The markets have already expressed their opinion on the second question, more cuts than those expected by the major central banks and the expectation of a soft landing for the US economy.
However, it is worth noting that never since 1945 has inflation fallen from above 5% to below 3% without a recession having occurred since the start of the decline or in the following 18 months.
Yet, to keep track of the performance of the American economy (therefore also a large part of the global one) it is necessary to take into account public spending, credit and the cost of credit, private wealth, the labor market and wages. As seen in the previous report, financial conditions in the USA are rather “loose”, thus favoring an expansion of economic activity. The consumption of American citizens is robust according to the trend of credit card loans. However, if we look at the Eurozone, 2023 was a year of economic stagnation essentially due to the role of foreign demand as well as the higher interest rate environment. Although it is true that the PMI indices were contracting, it is also true that they appear to be close to finding a bottom from which to restart or stabilize.
As written previously, European companies are more concerned about rising labor costs than credit conditions. Even in the European case it will therefore be necessary to monitor the trend of the labor market which still remains in mismatch between supply and demand if we look at the manufacturing sector.
Overall, it can be said that 2024 will be a challenging year, difficult to predict with a horizon of 1 year what could happen in financial and economic terms with all the variables being analyzed that are not easy to analyze. Given the current situation of the global economy, it is likely that the Chinese authorities will implement further stimuli, but targeted on certain sectors, while in the USA there does not currently appear to be any neither a recessionary nor a “soft landing” dynamic but rather a continuation of the normalization of some excesses supported by an expansionary fiscal policy.
Europe has a more marked recessionary dynamic but currently finds itself continuing the pattern stagnation last year, inflation in the Old Continent could be close to a bottom, forcing the ECB to postpone any rate adjustments. The main danger today for the markets is that the probability of a recession and consequently the monetary adjustments of central banks have been incorrectly priced.
In a similar context, the recommended duration remains maximum over a 3-year horizon maintained on high credit quality securities with a boost of carefully selected high-yield securities. Inserting a variable rate component can be useful to mitigate the risks of a portfolio with a longer duration and today can have an adequate risk-return.
In the first months of the year, equity could continue its rally, supported by a stalemate in the economy and inflation under control. Such an environment favors Growth stocks over Value stocks. Geographically, the USA remains the most investable market compared to the others, Chinese stock levels are interesting but it is difficult to say whether a bottom has been reached from which to start again. THE precious metals they continue to be interesting as protection because in the scenario of recovery, inflation or recession they remain “safe havens”.
From a strategy perspective, multi-assets can offer necessary diversification in a nebulous macroeconomic and geopolitical context while low beta alternatives are less attractive as long as those who do not want to take risk can achieve returns on the money market.