Chapters
Market observations
2024: Recession fears fade
Iain Cunningham – Head of Multi-Asset Growth
Our outlook and strategy positioning has evolved over the past quarter as we have revised the probability of US recession lower and the probability of a soft landing higher due to emerging evidence.
A more favourable US outlook
In the US, we believe monetary policy is tight and will continue to progressively feed into the economy through corporate and household refinancings, as they take place. The Federal Reserve (Fed) has however signalled a desire to cut interest rates. If the Fed’s growth and inflation forecasts prove correct, then two to three 0.25% cuts will likely take place later this year. At the same time, fiscal policy in the US has remained loose and continues to support economic growth, while weak areas of the economy have begun to improve recently. This combination of prospective policy loosening, ongoing fiscal support and improvement in manufacturing and real estate has increased the probability of a soft landing in the US economy. We continue to expect growth to moderate through 2024 in aggregate, but we have revised down the probability of recession over the next 12 months.
Figure 1: US credit impulse
Figure 2: US PMIs
Source: Ninety One, March 2024.
Europe is not as fortunate
In Europe, we believe policy is tight and the lags are shorter than in the US due to less pandemic stimulus, higher levels of floating rate debt and notably less fiscal support. Growth indicators remain weak but appear to be showing some modest signs of improvement at a low base, although there is still prior tightening to feed through. Inflation is falling quickly, and three-month annualised core inflation statistics are currently below the European Central Bank’s (ECB) target. We see an elevated risk of a deflationary period in the eurozone and believe that the ECB is likely to be one of the first major central banks to ease policy this summer.
Figure 3: Euro credit impulse
Figure 4: Euro PMIs
Source: Ninety One, December 2023.
China’s recovery remains bumpy
In China, policy appears loose albeit without material easing taking place. Easing measures are however becoming progressively more forceful. The People’s Bank of China’s (PBoC’s) balance sheet has expanded in recent quarters, while additional fiscal measures focused on boosting consumption have been announced. We expect policy makers to continue to ease through various measures as they aim to ensure that a sustained recovery takes hold. Growth metrics remain mixed, and the recovery remains bumpy. We expect it to remain so without more forceful easing measures. Inflation remains weak but base effects should begin to provide more support on a forward-looking basis. We continue to believe that the Chinese economy will experience a more benign outcome than the bearish consensus suggests.
Figure 5: China credit impulse
Figure 6: China PMIs
Source: Ninety One, March 2024.
Looking ahead
Our central investment roadmap, as discussed above, leaves us somewhat more constructive on the prospects for risk assets, particularly in Asia and the US. In fixed income, portfolio duration declined through the first quarter post a strong rally in government bonds at the end of last year and due to an increase in the probability of a US soft landing. However, we maintain an overweight to defensive duration, particularly in Europe. In currency we maintain a preference for reserve currencies – especially the Japanese yen vs. the euro, where we see scope for policy tightening from the Bank of Japan (BoJ) at a time when the ECB is likely to be easing policy. We also moved longer the US dollar versus Asian and European currencies over the quarter, due to the improved outlook for the US economy versus other regions.
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