Monthly house view | April 2024

Macroeconomy

While the rise in global industrial production over the past year has been essentially due to emerging economies, there are signs that the manufacturing downturn in advanced economies, including in Europe, may be coming to an end as wild, post-covid swings in inventories fade. We forecast global GDP growth of 2.9% this year, down from 3.1% in 2023, with this decline in part attributable to the US, where we see GDP growth of 2.1% (but with risks tilted to the upside). Although inflation is likely to remain above pre-pandemic levels, our central scenario is still for the Fed to start cutting rates in June, with a total drop of 125 bps in the Fed funds rate by end-December. At the same time, we recognise there is a risk we see a smaller cut to rates if US inflation continues to prove sticky. Barring some major surprise, there is more confidence that the ECB will start to cut rates in June, with the possibility that the ECB’s deposit rate sinks to 3% at end-December (from 4% today). We also expect the Bank of England to start its easing cycle in June, with economic growth in the UK picking up in the months ahead. There was a noteworthy rise in the official purchasing managers indexes for Chinese manufacturing and nonmanufacturing in March, but China’s recovery will likely be gradual as festering problems in property continue to undermine consumer confidence. We believe the Chinese authorities will be hard pressed to meet their 5% GDP growth target for this year (our own forecast of 4.7% faces downside risk). With the Bank of Japan becoming the last central bank to raise rates last month, we expect Japan’s GDP growth to moderate to 0.7% this year (from 1.9% in 2023). In the rest of Asia, Korea and Taiwan are benefiting from the upswing in the global semiconductor cycle, but the outlook for ASEAN countries is hazier, while India continues to race ahead (we expect GDP growth of 8.1% in the fiscal year ending 31 March 2025)

Asset classes

Equities: The recent rise in 12-month forward earnings expectations has been especially fast in Japan, where we are overweight. But earnings forecasts have also risen for US mega-tech companies. As market participants continue to hope for a broadening out of US market gains beyond tech, one notes decent upgrades to earnings-per-share forecasts across sectors (with the exception of oil & gas). Overall, recent forecasts point to a hefty 11% rise in earnings for S&P 500 companies and 7% for Stoxx Europe 600 ones this year. A close look at the US tech sector shows that the improvement in prospects is heavily concentrated in companies associated with the boom in semiconductor chips needed in GenAI applications whereas momentum has slowed in other parts of the tech sector. Nevertheless, valuations for big US ad tech and ecommerce groups may not be excessive in view of their earnings dynamics.

Fixed income: Reflecting a bumpy disinflation process, the US Treasury market remains relatively volatile, with a high chance that Fed rate cuts are more modest than markets had been expecting just a couple of months ago. With the fiscal outlook on both sides of the Atlantic also looking uncertain, we remain neutral on US and core euro area government bonds. Unlike Bunds, yields on 10-year Italian government bonds have not moved up much this year, leading us to cut our spread forecast for the end of this year—although we remain neutral on euro peripheral debt overall. Continued strong investor demand ahead of possible rate cuts has been helping narrow spreads on corporate debt. But while we have been revising down our forecasts for the default rate, we remain cautious on noninvestment-grade credits as we believe risk is been adequately rewarded at current spread levels. We continue to prefer investment-grade credits at current yields.

Currencies, commodities, hedge funds: We have an underweight position on sterling versus the USD, with the prospect of near-term rate cuts undercutting the UK currency’s strength. After the Bank of Japan’s decision to end negative interest rates, we continue to have a neutral view on the yen, believing its fortunes against the USD will depend more on Fed actions than domestic policy decisions. We see recent developments in global oil supply (stable in February) and demand (it rebounded in February) as consistent with our scenario for the Brent oil price that hovers above USD80 per barrel in H1. Hedge fund strategies continue to positionportfolios in reference to signs of a shift in the macro paradigm, asset pricing and prospects for market volatility and dislocation, with global macro and systematic trading strategies counting on asymmetric economic policies to drive dispersion.

Asian assets: While the MSCI Asia underperformed developed-market indexes in Q1, Korean and Taiwanese equity indexes have lately been performing comparatively better, helped by the upturn in the global semiconductor cycle. By contrast, Hong Kong has been losing ground. A stabilisation in China’s economic prospects should help sentiment towards Chinese equities. Stretched valuations mean we are neutral on Indian equities, as we are on Asian (ex-Japan) equities overall. Asian noninvestment-grade bonds have been pushing ahead, echoing optimism about the situation in Chinese real estate. Our own opinion is that there are still issues in the real-estate sector and that a cautious stance toward lower-quality bonds remains justified, despite temptingly high yields. Our preference is still for Asian investment-grade corporate debt. For the moment, high US rates and a weak renminbi are a challenge for other Asian currencies, especially those that do not offer a high carry. As for the renminbi itself, we would expect the authorities to intervene to curb further excessive weakness, which would jeopardise efforts to internationalise the currency.

Asset-class views and positioning

We have recently raised our year-end forecasts for equity indexes. Nonetheless, we remain neutral on equities globally, based largely on our view that US equities are expensive and that we still need to see a sustained broadening out of US market gains beyond a handful of ‘Big Tech’ stocks. Out preference continues to go to companies with healthy cash flows and low leverage, generally the same ones that return cash to shareholders in the form of dividends and share buybacks. We remain overweight the Japanese equity market in light of recent corporate governance reforms and brightening earnings prospects. We continue to be upbeat on investment-grade corporate bonds, seeing current yields as highly attractive. By contrast, low spreads mean we are underweight noninvestment-grade bonds. Along with sterling, we are underweight the Swiss franc versus the USD, with disinflation trends pointing to further easing of monetary policy after the Swiss National Bank’s surprise rate cut in March. We maintain our strategic overweight position in gold, which has been propped up by lingering concerns over inflation and healthy official buying.

Three investment themes

Elections in a world of fiscal dominance (country selection + active management): This year is marked by a series of important elections around the world against the backdrop of concerns around high or rising public debt burdens. In these circumstances, our preference goes to countries with healthy fiscal dynamics. The increased volatility that could stem from fiscal issues may afford opportunities for global macro hedge-fund strategies.

From top-down to bottom-up liquidity: As liquidity injections from central banks dry up, the focus is returning to liquidity at a corporate level. We believe it is vital to discriminate between companies with healthy cash flows and those less well endowed. Of particular interest are companies with sufficient free cash to fund dividends and equity buybacks, as well as those robust enough to pay down their debts.

M&A revival: After two years of subdued deal activity, there has been a recent pick-up in mega deals, essentially in the US. In view of rising equity values and upcoming rate cuts, we believe the upturn in M&A will spread in the coming months by region and sector.