Summary
Global growth is likely to decelerate over the following months as the lagged effects of rate hikes kick in. Markets, however, seem to be pricing in a more optimistic scenario, buoyed by better-than-expected US economic data. Nonetheless financial markets will experience higher volatility this year as investor sentiment will continue to be affected by rising political risks, social instability and election outcomes.
Market update
Equities: Global equities continued to rise in February, supported by resilient earnings, most notably, from several of the ‘Magnificent Seven’ stocks and Chinese equities. As US inflation came in stronger-than-expected, the US 10-Year Treasury yield rose over the month from under 4% to end closer to 4.3%-month end. Against a backdrop of rising US yields, US stocks still outperformed, with five of the ‘Magnificent Seven’ meeting or exceeding earnings expectations. Asia ex Japan equities posted positive returns, supported by the snapback in China equities. Signs of improving macro data and news of various support measures - including a cut to the five-year loan prime rate (i.e., key mortgage reference rate), and restrictions on short selling (and securities lending) by China’s securities regulator - buoyed the Chinese market over this period.
Fixed Income: Government bonds were generally under pressure in February, amid markets scaling back expectations of Fed rate cuts in 2024. Yields on 2-year, 5-year and 10-year US Treasury notes climbed by 41bps, 41bps and 34bps to 4.62%, 4.24% and 4.25% respectively. The Bloomberg Barclays Global Aggregate Index was down -1.26% amid higher yields. The US high yield market (proxied by ICE BofA U.S. High Yield Constrained Index) posted 0.30% while the Asian credit market (proxied by J.P. Morgan Asia Credit Index) returned 0.09%.
Macro overview
Growth: Global growth is likely to decelerate over the following months due to the lagged impact of aggressive monetary tightening. While the probability for a soft landing has increased, supported by the recent slew of better-than-expected US economic data, market participants appear to be pricing in a more optimistic scenario. Nonetheless, on a 12-month view, our base case is that a global recession remains possible (albeit a shallow one in magnitude), led by the Developed Markets as the lagged effects of rate hikes start to impact growth.
Inflation: US CPI data continued to run hotter-than-expected in February. While “stickier” inflation and still resilient US growth may delay the Fed’s pivot, we believe the disinflationary trend will continue to play out over the medium term. This is likely to be the case as the US labour market demand starts to cool (i.e., wage inflation is moderating) and US consumption starts to run out of steam (i.e., excess savings is depleting).
Monetary Policy: Developed Markets’ central banks are already at the end of their respective rate-hiking cycles. After holding its key rate steady in January for the fourth straight meeting, there is a 99% probability the Fed will again hold the policy rate steady at the upcoming March 2024 meeting. We believe the Fed will remain cautious and continue to walk a fine line between proactively loosening its policy (potentially risk restoking inflation) and remaining too restrictive (further contributing to a growth slowdown). The data to watch for is wage growth. This needs to come down enough to lower overall core inflation towards the Fed’s target to compel the Fed to pivot to rate cuts.
Asset class views
Source: Asset class views are as of the investment team’s most recent meeting in early March 2024, and should not be taken as a recommendation. The information provided herein is subject to change at the discretion of the Investment Manager without prior notice. 3m = 3-month view. 12m = 12-month view.
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