Monthly house view | March 2024

Macroeconomy

The latest purchasing manager data suggest that global manufacturing may be picking up again, thanks to an improvement in new orders. Rising industrial demand for copper points in the same direction. As for major economies, we are upgrading our forecast for the US economy this year. While we think US growth will slow from last year, we no longer see economic contraction in H1 and believe real annual GDP growth of 2.1% this year. Our central scenario is for five 25 bps cuts to the Fed funds rate between June and the end of the year, although upside risks to growth and inflation could mean rate cuts are shallower. We see a gradual improvement in the euro area economy from the current stagnation and continue to expect four 25 bps rate cuts from the ECB this year, starting in June. While consumer spending generally improved over the lunar new year holidays, issues in the housing market continue to weight on confidence in China. Our forecast for real GDP growth in China this year remains at 4.7%, but faces downside risk. Muted domestic demand justifies our decision to lower our GDP growth forecast for Japan to 0.7% this year. We continue to expect the Bank of Japan to exist its ultra-loose monetary policies in H2 but see a rising possibility that it moves sooner.

Asset classes

Equities. The resilience of the US economy together with improved forecasts for earnings growth have led us to raise our stance on US equities from underweight to neutral, although we remain mindful of high valuations and investor complacency. We have raised our position on Japanese equities to overweight for a number of reasons, including particularly strong earnings momentum. In Asia outside Japan, we believe that Chinese equities will take their cue from the authorities’ willingness to contemplate further stimulus. Market reforms make Korean stocks worth watching, but we are cautious on Indian stocks given their high valuations. Sector wise in developed markets, industrial-sector firms have started to guide toward improvements in businesses sensitive to the near-term health of the economy and earnings expectations have been rising. After two challenging years, we also see renewed interest in the medtech and biotech parts of healthcare. Finally, while we think the European banking sector will find it hard to repeat its recent outperformance, there remain opportunities among individual banks.

Fixed income. Bond yields have risen again in recent weeks to what are attractive levels, especially in view of mid-year rate cuts. But bond yields could remain volatile in the short term, depending on inflation figures. US Treasuries in particular also face challenges from the electoral cycle and a growing public deficit. In corporate bonds, the rise in yields has spurred demand among investors anxious to lock in carry before another downturn in rates. We continue to see potential for moving cash to quality (investment-grade) credit instruments. At the same time, we believe that higher interest payments could become an issue again for corporate issuers as existing debt needs to be rolled over.

Currencies, commodities, private equity: With the Swiss National Bank beginning to show unease about the impact of a strong currency and with signs that the global manufacturing cycle may be improving, we think the defensive Swiss franc will be challenged to maintain its recent strength. In commodities, demand from emerging markets continue to support oil prices, while a bourgeoning improvement in global manufacturing has contributed to increasing demand for copper. After a challenging two years for private equity, we see scope for an increase in takeover deals at attractive valuation, with this year proving propitious for first-time investments.

Asset-class views and positioning

We have raised our position on the US equity market from underweight to neutral and on the Japanese market from neutral to overweight. In the case of US equities, the positives include a resilient economy and the chance we see a broader-than-before recovery in earnings, especially if manufacturing improves. At the same time, high valuations, signs the market is overbought and low volatility are all reasons to remain somewhat cautious. Having reached heights last seen in 1990, we believe the Japanese equity market has further to go given important corporate government returns and healthy earnings guidance. The Japanese market offers a diverse range of reasonably priced stocks. We remain neutral on the European equity market. The bond market remains relatively volatile given that the timing and scope of policy rate cuts remain unsettled. We continue to like investment-grade corporate bonds (particularly in the five- to seven-year range) but are less enthusiastic about the risk-reward profile of noninvestment-grade credits. We continue to overweight emerging-market government bonds in local currency.

Three investment themes

Transition from consumers to producers: After years when consumers were the main economic growth engine, we believe that momentum could move more to improvements in the manufacturing cycle in the months ahead. We see interesting opportunities emerging in industrial-sector companies aligned with some of our long-term investment themes such as the energy transition, digitalisation and building robust supply chains.

Favour companies engaging in buy-backs: We continue to favour companies with plentiful liquidity and that are capable of paying down their debts and returning money to shareholders in the form of buybacks and dividends in a sustainable way.

Be selective in private assets: In a world where financing from traditional sources has grown scarcer, we believe that there is scope to look at appropriately calibrated private credit strategies that focus on quality. Sagging valuations and looser monetary policy should also mean uncorrelated, long-term returns are easier to find in private equity too.