The economy: An uneven global slowdown
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As 2024 begins, we see divergent growth trends in the major economic areas: the US retains its strength due to the muscle of the technology sector, weak growth persists in the EU, and China fails to dispel misgivings about its recovery.
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Favourable inflation data in both the US and the EU in the last three months has led “Mr. Market” to conclude that inflation is now under control. This is reflected in the price of most assets, taking into consideration the prospect of a soft landing.
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Germany leads Europe’s sluggish growth (amid a technical recession), as does the industrial sector, while services maintain anaemic growth in the economy overall. The Spanish economy, meanwhile, is outpacing the European average in terms of growth. The European economy is affected, in part, by weakness in China, whose recovery still has investors apprehensive (see Appendix).
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The slowdown (soft landing) is the result of contractionary monetary policies (interest rates), as opposed to expansionary fiscal policies (public spending).
Germany’s post-pandemic economic recovery has faltered
Markets: Waiting on the central banks
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The good macro data at year-end prompted continued optimism on the markets, which posted sharp gains on the prospect of rate cuts in 2024, cuts whose schedule is yet to be confirmed.
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Initial earnings reports for 2023 indicate persistent growth, albeit with sizeable disparities by sector and company.
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For this reason, any delay on the part of the central banks in cutting rates that the market has already taken into account would result in price corrections for both shares and debt securities.
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Thus, US Treasury bond yields rebounded this month from December lows. Rising yields mean falling prices.
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Regardless, official interest rates are above registered inflation. In other words, monetary policy remains contractionary at the moment.
Investment policy: Caution in valuations
- Many observers believe that the rapid recovery of share prices in 2023—which, in the case of several EDM portfolios meant recovering 2022 valuation losses—partially anticipate the advances expected in 2024.
- This scenario prompts the reorganisation of portfolios with greater concentration on bonds, which continue to attract the majority of investment flows.
- The caution recommended does not stem so much from excessive valuations, should the expected 2024 profit growth materialise, but from the many unpredictable, global, geopolitical risks we face.
- It should be noted that the expectation to maintain yields for long-term bonds (5+ years) is removed from the consensus of interest-rate cuts in the short term. The enormous demand for public treasuries to refinance debt contracted at low rates during Covid is not unrelated to this fact.
- Therefore, in this moment of waiting on the central banks, the safest, most ascertainable approach is the selection of quality assets. This includes companies with businesses that have minimal cyclical dependence and little or no debt.
- With regard to bonds, the diversification of maturity dates is advisable. It is premature to dive entirely into credit risk (HY) without assurance that the risk of a recession is definitely behind us.
Appendix
LEGAL CONSIDERATIONS
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. Market fluctuations due to unforeseen circumstances.
. Liquidity risk and other risks that alter the evolution of the investment.
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