Financial markets: what to expect from 2024?
Portfolios will need to have more duration risk in 2024 than in 2023, especially in light of expected moderate growth in the United States and Europe. Analysis by Fabrizio Santin, senior investment manager at Pictet Asset Management
The last few weeks have seen positive results from global stock markets and have seen a sharp decline in bond yields, which have finally found greater tranquility after a complicated autumn phase.
HOW THE STOCK LISTS ARE GOING AND HOW THEY WILL GO
Since the October lows, the main stock markets have gained over 10 percentage points, while bonds have seen a marked drop in yields, from 5 to 4.2% for the US 10-year bond and from 3 to 2.2% for the German Bund. The rally we witnessed between the end of summer and autumn was an episode of panic for government bonds and generated a phase of high positive correlation between stocks and bonds which is now receding.
LIST ANALYSIS
What happened is comparable, in terms of intensity and speed of the movement, with what was observed last autumn or even during the 2013 Taper Tantrum.
THE RECOVERY OF THE FINANCIAL MARKETS
The recovery of the financial markets is attributable to Central Bank communications and macro data. Central bankers seem satisfied with the level of normalization of economic activity and the rapid return of inflation, especially in Europe, and are starting to give greater importance to financial conditions.
MACROECONOMIC DATA
In recent weeks, macroeconomic data have begun to signal, even in the United States, a slowdown in manufacturing activity and consumer demand. The markets, as always, anticipated the cycle of interest rate cuts in both Europe and the United States; essentially betting against the higher for longer paradigm, taking comfort from weak inflation data. In our opinion, this attitude seems overall right but tactically excessive for the depth of the built-in easing.
WHAT THE WALLETS WILL LOOK LIKE
That said, we believe that portfolios should have more duration risk in 2024 than in 2023, especially in light of growth in the United States and Europe expected to be below potential, particularly in the first part of 2024. The fate of the markets shares will largely depend on the evolution of corporate profits, which according to analysts' estimates should grow by more than 10 percentage points. In our opinion, this is an optimistic expectation in the absence of a new acceleration of the cycle.
ACTION DOSSIER
Stock valuations are not extreme, but they embrace a soft landing scenario for the economy with no margin for error. 2023 is about to end with overall good results for the financial markets, the result of the overall strength of the developed economies, despite highly restrictive monetary policies and geopolitical risks arising from the conflicts in the Middle East and Ukraine. The positive for markets is that the Fed has managed to maintain its credibility and that we are on track to declare victory on the objective of price stability.
THE SCENARIOS
The conclusion of the phase of financial repression gives us a new asset class: the world of bonds, having emerged from more than a decade of zero, or even negative, rates, once again becomes a crucial element for building and diversifying investors' portfolios. Once correlations return to a bit more normal, diversified investments, such as multi-asset strategies, will return to greater continuity. For this reason we believe that 2024, with the definitive return of inflation in developed countries, will be able to provide the appropriate context.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/mercati-finanziari-cosa-aspettarsi-dal-2024/ on Mon, 01 Jan 2024 06:20:54 +0000.