Guide to the Markets: Daily edition
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Key themes for Q1 2024
Too early for a victory lap
Western economies have been remarkably resilient in the face of higher interest rates (Guide to the Markets – UK pg 4). We would argue this is in part due to the ‘long and variable lags’ in the transmission of monetary policy (pgs 21, 38). The good news is that inflationary pressures are easing (pgs 6, 7) and therefore central banks can pause or even cut interest rates should economic data deteriorate meaningfully (pg 8). We still expect 2024 to be a period of weaker economic activity, particularly in the US where consumer spending has been unsustainably strong (pg 17).
Locking in yields
The interest rate narrative has shifted from ‘how high will they go?’ to ‘when will they be cut?’ (pgs 20, 31, 37). This is supporting bond prices (pg 75). It seems prudent to lock in the yields now available on high-quality fixed income (pg 66). If there is a degree of resilience in the economy, investors will earn a decent coupon, but if the economy cracks and interest rates have to be cut substantially then the upside on core government bonds could be meaningful (pgs 69, 74).
Equities: Problems at the margins
Equity markets performed well in 2023 as fears of a hard landing receded (pg 65). However, expectations of expanded margins and sales into next year could be challenged if economic activity does weaken (pgs 47, 64). Investors should note that US stocks trade at a record premium to those in Europe and emerging markets (pg 46). Given the prospect of economic convergence and election uncertainty in 2024, investors may wish to consider whether they have appropriate geographic diversification.
Targeted alternatives for targeted risks
Structurally, we think investors should consider what alternative assets can bring to a portfolio that traditional public markets lack, such as those assets that are resilient to broad market volatility or inflation shocks (pgs 78, 79).