.png)
Global growth dynamic pickup is underway
Developed economies continue to exceed expectations, with positive economic surprises across all key economic areas.
Economic Surprise Indices
(Actual data release vs. consensus expectations)
Developed Economies
Economic Surprise Indices
(Actual data release vs. consensus expectations)
Emerging Economies
The US economy continues to grow firmly, slightly above trend, supported by a resilient labor market that fuels robust consumption growth.
US unemployment rate and selected gauge of labor market tightness
Nonfarm payrolls and retail sales (annual change)
The Eurozone continues to recover (with Germany lagging behind), as consumption in services benefits from the ongoing disinflationary trend.
The Japanese economy also exhibits positive momentum, and the end of deflation might be in sight.
The Chinese economy is stabilizing at a growth rate around the 5% target, as a moderate recovery in consumption and industrial activity balances persistently difficult conditions in the real estate market
Short-term inflation dynamics remain stronger than expected, especially in the US, fuelled by resilient final demand and upward pressures on energy and commodity prices. However, upward pressures on wages are gradually abating and still suggest that underlying inflationary pressures will ease in the medium term.
On the political front, fiscal intervention is no longer a tailwind for growth in 2024, but not a headwind either. Many important elections in 2024 (US first and foremost) could impact medium-term economic and geopolitical prospects. Geopolitical risks remain elevated.
Rate cut expectations are revised downward
Rate cut expectations are being revised lower in this context of positive growth momentum and sticky inflationary pressures. The expected global rate cut cycle might rather be a “fine tuning” exercise of policy recalibration rather than the typical rate cut cycle of the past two decades
Current projection of Fed & ECB rate cuts:
less than two 25bp cuts for the Fed, three 25 bp rate cuts for the ECB (starting in June)
Alternative measures of liquidity show a slightly less favorable environment entering Q2.
Our scenario: US resilience and improving global momentum reinforce the likelihood of a “soft landing” in 2024.
Indicators review summary - our five pillars
EQUITIES
We continue to be constructive on equities as an asset class. The macro regime remains supportive as global leading indicators continue to show signs of a glob al pick-up in economic activity including signs of stabilization in China. The earnings season is on and, on aggregate, earnings and guidance in the US are on pace for a 10% yoy growth in 2024.
The better health of the US economy makes inflation stickier there, and investors have re-assessed the timing for interest rate cuts by the FED and the ‘higher for longer’ scenario while geopolitical tensions in the Middle East have exacerbated this repricing process. This is causing some style rotation away from momentum and growth.
In terms of regions, our preferences are for the US and Europe. In the US, the strong economy remains a support for equities even if rate cuts are delayed. The resilient economy will allow for a broader earning growth next year.
In Europe, while the economy is less buoyant, inflationary pressures are receding, which is a short-term support for corporate margin, and the ECB is likely to cut interest rates sometime this year. In addition, valuation is less stretched (left chart) and Europe, which is a bit more cyclical and value in style than US equities, is stabilizing in terms of relative performance (right chart). Finally, for once, the banking sector is not a weak link for the region.
On the other hand, we are now less enthusiastic about Japanese equities after the strong performance in local currency as the continuous weakness on the yen is making the mission of the BoJ more complicated while inflationary pressures are mounting.
FIXED INCOME
We are keeping our negative stance on Fixed Income, primarily driven by our bearish view on the long end of the yield curve and a cautious approach towards the credit markets. Specifically, we maintain a neutral outlook on Investment Grade (IG) bonds, while harboring a slightly negative view on High Yield (HY) bonds. We have downgraded Emerging Market (EM) debt denominated in USD from neutral to negative, as valuations have become expensive, and the protracted normalization of Federal Reserve monetary policy is likely to hinder EM debt performance.
Our assessment of government bonds is differentiated by maturity. For bonds with maturities under 10 years, we remain neutral, buoyed by high real yields and the likelihood that central bank tightening has peaked. However, we are cautious towards longer-maturity bonds due to an inverted yield curve and negative term premiums, which lessen their attractiveness amid ongoing rate volatility. Concerns about the timing of the Federal Reserve's first rate cut and the trajectory of policy normalization also weigh on valuations. Additionally, projections of a growing US fiscal deficit and increased Treasury issuances—expected to double in 2024 compared to 2023—in a period where central bank demand is diminishing (quantitative tightening) complicate the outlook. Nevertheless, market expectations are now more closely aligned with the Federal Reserve's anticipated rate cuts in 2024, indicating a much longer path to policy normalization than previously expected by the market.
Balancing the Scales:
Positive vs. Negative Factors in Bond Investments
Source: Syz CIO office
Volatility Comparison Between Bond and Equity Markets
Source: Syz CIO office
In Europe, we maintain a neutral stance despite a recent uptick in Eurozone economic activity. Our baseline scenario still anticipates the first ECB rate cut in June, yet the pace of normalization remains uncertain, heavily dependent on economic data. With wages remaining high, particularly in the services sector, and European inflation being sensitive to commodity prices, caution is advised. The tightening
of spreads, especially between Italian and German 10-year yields, further necessitates a cautious approach. While we previously held a positive outlook on UK government bonds, the strong economic ties to the US and recent upward revisions in Gilt supply by the Debt Management Office have prompted us to adjust our stance to neutral, recognizing
the Bank of England’s difficult position as the job market deteriorates.
Within the corporate bond segment, we continue to adopt a neutral stance on investment-grade corporate bonds. A significant tightening in credit spreads, now at their lowest levels since 2021, has substantially reduced the margin of
safety, with spreads now accounting for only 15% of the total yield on investment-grade bonds. This "priced to perfection" scenario calls for heightened vigilance. However, given that the macroeconomic outlook remains positive—supported
by strong US corporate fundamentals and growing concerns about the sustainability of US Treasury debt—a premature reduction in credit exposure might be overly cautious. In the High Yield sector, we favor subordinated debts due to their favorable risk/reward profile. We also see value in short-term maturity corporate high yield bonds.
Breakdown of Yield in Different Fixed Income Segments
Source: Bloomberg, Syz CIO Office
We have shifted from a neutral to a negative outlook on hard-currency Emerging Market (EM) debt. While we find specific opportunities in EM bonds with maturities up to 4 years and yields above 6.5% appealing, concerns about a strengthening US dollar and rising US real interest rates are
significant. The comparative outperformance of this segment in recent months, relative to other bond markets, has led us to take profits. Additionally, the sentiment is deteriorating towards this fixed income category, as evidenced by persistent negative capital flows since the start of the year and an increase in short interest in USD-denominated EM debt, indicating growing market pessimism.
ALTERNATIVES
Within commodities, we remain positive on gold, which continues to exhibit low volatility compared to other asset classes and should be a beneficiary of any tail risk event. We note that a significant gap remains between gold and real yields. Why? 1) With debt sustainability having become an ever-increasing issue, the market anticipates that real interest rates cannot stay at this level for too long; 2) Investors
buy gold as an insurance against adverse circumstances (inflation, recession, etc.) 3) There is heavy demand stemming from central banks, especially emerging markets.
We are tactically adding to commodities as a portfolio diversifier and protection against inflation upside. Commodity prices are moving higher driven by strong US growth, geopolitical uncertainty, segmentation of global trade and AI demand for energy. We also note that Commodities relative to equities currently stand at a near record low.
Source: Vontobel
We maintain a neutral view on Hedge Funds. We like well- established Global Macro funds that have a multi-portfolio managers approach. We cautiously like Relative Value funds but are wary of liquidity conditions. We like having a core position in a diversified systematic strategy with a long-term commitment. We prefer staying away from Equity long/short and directional funds as their beta is too high. We do not like Event Driven funds as we believe the merger & arbitrage landscape will be very challenging in 2023.
ASSET ALLOCATION GRID
TACTICAL POSITIONING: OUR ASSET ALLOCATION MATRIX
