Last week in a nutshell
- The ECB maintained borrowing rates at historically high levels while carefully paving the way for a reduction in June.
- The US job report revealed the addition of 275K nonfarm payroll, while hourly earnings moderated, signalling a Goldilocks context for financial markets.
- The absence of clear plans for achieving a 5% GDP growth rate in China raises the risk of continued weak demand and deflationary pressures.
- The Super Tuesday confirmed a rematch in November between President Joe Biden and Donald Trump as both secured significant wins.
What’s next?
- An extensive series of international consumer and producer prices figures - including US ones - will help investors assess key trajectories in central banks’ stance.
- In the US, retail sales and the preliminary Michigan Consumer Sentiment along with inflation expectations and current conditions will shed some light on how the American consumer feels about the economy.
- UK data including labour market indicators and the Bank of England's inflation attitudes survey will give us the pulse of the local economy.
- In China, the National People’s Congress will continue amid the publication of loan growth data, house price index and a decision to be made by the People’s Bank of China on its Medium-Term Lending Facility Rate.
Investment convictions
Core scenario
- The last leg of the steady path from a 3% to a 2% inflation rate seems to be more bumpy in the US than in the euro zone. Overall, the growth / inflation mix is undeniably returning to “familiar” territory.
- A soft-landing/ongoing disinflation scenario in the United States remains our most likely scenario, implying no rush for the Fed to deliver monetary support. We don’t expect the first monetary easing before the end of the first half.
- 2024 should bring better visibility with a narrowing economic growth gap between countries while most central banks have restored room for manoeuvre.
- In China, economic activity has shown some fragile signs of stabilisation while the evolution of prices remain deflationary.
Risks
- While uncertainty remains on the timing of the start of monetary easing, a downside risk would be too prudent of an approach towards monetary easing by central banks and a disappointed market.
- Geopolitical risks to the outlook for global growth remain tilted to the downside as developments in the Red Sea unfold. An upward reversal in the price of Oil, US yields or the US dollar are key variables to watch.
- A risk would be a stickier inflation path than expected which could force central banks to reverse dovish rhetoric. In our understanding, it would take more than just the bumpy data registered in January.
- Beyond commercial real estate exposures, financial stability risks could return as a result of the steepest monetary tightening of the past four decades.
Cross asset strategy
- Our asset allocation is broadly balanced. We acknowledge the current momentum supporting the US equity market, have the weakest conviction on the European market and are neutral Japan and Emerging markets although both seem to have turned a corner.
- We have the additional investment convictions:
- We keep a neutral allocation as sentiment seems stretched and provided the absence of a sell signal in our proprietary analysis.
- We look for specific themes within Equities. Among them, we like Technology / AI and also remain buyers of late-cycle sectors like Health Care and Consumer Staples. We look for opportunities in beaten down stocks in small and mid-caps or within the clean energy segment.
- In the fixed income allocation:
- We focus on high-quality credit as source of a pickup in yields.
- We also buy core European government bonds with the objective to benefit from the carry in a context of cooling inflation.
- We remain exposed to emerging countries’ debt to benefit from the attractive carry.
- We maintain a neutral stance on US government bonds, looking for a new, more attractive, entry point as we expect markets to revise their Fed outlook further down the line.
- We hold a long position in the Japanese Yen and have exposure to some commodities, including gold, as both are good hedges in a risk-off environment.
- We expect Alternative investments to perform well as they present some decorrelation from traditional assets.
Our Positioning
The US market rally since October is exceptional compared to historical observations and we acknowledge the current momentum although after this atypical number of successive rises, the probability of a short term consolidation has risen. We have a supportive stance on US equities, are more cautious on the European market, neutral on Japan and Emerging markets. In terms of sectors, we are constructive on the Technology, Health Care and Consumer Staples sectors. Within the fixed income segment, we are open to adding European duration, have less conviction on US duration, continue to harvest carry via Investment Grade credit and Emerging Market debt.
