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What investors should watch out for – Greed becoming pervasive

A lot hinges on whether the global economy is setting up for a soft landing



As of now, all signs indicate inflation rates will continue to drop. Can that set up investors for another good run this year?
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The start of the year is always an opportunity to step back and re-evaluate the environment, whether it be setting personal goals, re-assessing your career or reviewing your investment plan.

As you do the latter, I hope my 10 key investment themes below will help you decide how you might tweak your portfolios in January.

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Global growth to slow

While the US economy has been resilient so far, we are starting to see some signs of a deceleration. The good news is the US Federal Reserve has indicated a willingness to ease policy earlier than anybody expected. This is likely to increase hopes of an economic soft landing, especially with the inventory cycle becoming increasingly supportive and the labour market remaining tight.

Elsewhere, China’s economy is likely to stabilise in response to 2023’s policy stimulus. Europe is already teetering on the brink of recession and is unlikely to improve dramatically in 2024.

Inflation to decelerate

2023 was the story of goods prices decelerating. 2024 is likely to see service sector inflation decelerate, with shelter inflation potentially even moving into deflationary territory later in the year.

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Central banks to reverse course

The above environment is likely to encourage more central banks to ease monetary policy settings in 2024. Central banks will be aware that lower inflation means higher real interest rates, tightening monetary conditions.

Slower growth is likely to give the Fed the cloud cover to ease policy, with other central banks to follow suit. Indeed, the US has already indicated that this is the line of least resistance based on its current projections.

Positive bond equity correlation to raise all ships in early 2024

Our analysis shows that when inflation is high, bonds and equities are normally positively correlated. This makes sense as high inflation means central banks cannot worry too much about growth.

In this environment, upside inflation surprises lead to fears of monetary policies remaining restrictive and slower economic growth, which is bad for both stocks and bonds.

The reverse is also true – falling inflation reduces the pressure on central banks to raise interest rates and raises the possibility of rate cuts, which is good for equities and bonds. Once inflation falls to sub-2.5 per cent, then the bond-equity relationship is likely to normalise (turn negative), increasing the portfolio diversification benefits of owning bonds in your portfolio.

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High quality bonds to show their worth

Slower economic growth, lower inflation and interest rate cuts are likely to lead to lower bond yields. However, we continue to prefer Developed Market bonds with high credit quality as we view these as more attractive on a risk-return basis.

Of course, higher yields (and potentially higher returns) may be available elsewhere in the bond asset class, but at a time when growth is set to slow and the risks are skewed to the US and European economies tipping into recession, we believe the risk-return here is less favourable.

This is exacerbated by the fact that valuations, in the form of credit spreads, are expensive.

Global equities to rally into early 2024

Reduced concerns over a hard landing, alongside expectations that monetary policy settings are going to be eased, means the equity rally has further to extend. This should be further supported by the fact that earnings are likely to recover in 2024 after stagnating last year.

US and Japan stocks to lead the way

We expect US equities to lead the rally in early 2024, boosted by the market’s high exposure to the more economic resilient sectors, such as technology, communication services and healthcare. In Japan, we expect the Bank of Japan to be cautious when it comes to tightening policy, especially when inflation around the world is likely to peak.

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The increased focus on corporate governance is likely to continue to attract increased domestic and international flows into Japan’s stock market.

China is a stock pickers’ market

The challenges of investing in China’s stock market are numerous. The property sector look set to be a multi-year headwind from an economic perspective. Geopolitical tensions are unlikely to go away and will create volatility in specific sectors/industries/stocks. And even local policies can be unpredictable.

However, stock and sector dispersion in China is huge and this means active managers likely have a significant edge over passive strategies in this market.

USD to remain range-bound

It is tempting to chase the US dollar lower, especially as it is still close to multi-year highs in terms of valuation. If the US starts easing policy, this could put downward pressure on interest rate differentials in the near term. However, with Europe on the brink of a recession and the Bank of Japan likely to keep policy easy even if it emerges from years of negative interest rates, the allure of the USD’s relatively high interest rates is unlikely to disappear.

Have your hedges in place

Don’t have all your eggs in one basket, despite how convinced you are about the outlook. From our perspective, the most likely risk is a downside growth surprise. In this situation, we would expect the bond-equity correlation to turn negative and our overweight allocation to high quality bonds should cushion the blow from equity underperformance.

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The less likely, but more challenging, risk is a resurgence of inflation. In this situation, we believe liquid alternatives, gold and infrastructure assets are important diversifiers.

In summary, we see the start of 2024 as beneficial for investors. We feel less confident about projecting this through the whole of 2024. Therefore, we would look for signs that greed is becoming pervasive, or that the US economy is heading towards a recession, to reduce risk exposures at some point this year.

Steve Brice
The writer is Global Chief Investment Officer at Standard Chartered Bank’s Wealth Management unit.
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