|Dorian Raimond – Head Of Fixed Income Strategy And Trading Hilbert Investment Solutions
|What To Expect From The Rate Rally?
Can we expect severe rates tightening without getting an economic slowdown, which would impact the stock market? Both seem at odds with each other; a real headache for investors in 2024.
The trend set last year in November kept on going in December. The latest meetings from the FED, BOE and ECB have all been read as dovish; we are done with rate hikes, and steep cuts are expected and getting priced in for 2024.Ten-year yields have gone back to their December 2022 levels, already ahead of analysts’ expectations for end of 2024. The Dow Jones established a new all-time high, while the Nasdaq and the S&P500 were close to their record highs as well. Worth noting that the S&P500 performance of 24% in 2023 was split as +75% for the Magnificent Seven, and +12% for the 493 other companies.
Key Topics To Monitor In 2024
We care to watch out for:
(1) A resurgence of inflation, stemming from increased geopolitical tensions, and their impacts on supply chains and deglobalisation.
(2) A recession, which seems more likely for the EU or the UK than for the US.
Both risks would be headwinds for a large jump higher in stock index prices in 2024.
(3) Chinese economy, the country’s benchmark equity index was down 15% in 2023, and little case is made for a rebound. Any such scenario would come as a surprise and see equity outperform bonds, and likely create some tailwind for inflation as well.
(4) US elections, the campaign is likely to weigh on markets, and might complexify the task for the FED in the second part of the year. Numerous elections are actually taking place globally in 2024, including in India, the EU and the UK. This is a source of uncertainty which could create a more volatile trading environment.
(5) Artificial Intelligence, the impact on productivity is still to come (with its expected deflationary impact), while eventual winners and losers are still to be determined.
What Investment Strategy To Start 2024?
Following the strong rally in mid-and long-term yields at the end of last year, running after long term bonds does not look like the most appealing strategy, especially in Euros. The pullback we are getting early January is welcome in that regard. However, we favour levered short term exposure, while we wait for better entry points on the long end. Refinancing needs for corporates (and governments alike) are higher in 2024/2025 than they were in 2023. The bumper start of the year in terms of bond issuance attests of it. Those refinancing needs should weigh on long term yields. In a similar fashion, we like to own levered exposure on quality names rather than go down the risk spectrum at this stage of the economic cycle. Sectorial and thematic basket exposures might be gain in popularity over equity benchmarks.
To start the year, we like income strategies over upside exposure. In December, we did see an increase in interests for Fixed Income levered notes, while November had seen more focus on longer term bonds and notes. In line with our recommendation for December, we saw several private placements on range accrual notes last month, and we expect them to remain in fashion to start the year. The competition from vanilla term deposits will remain stiff initially, but we like to look at range strategies both on equity indices and on rates, to diversify away from autocalls while aiming for similar yields. We have seen a growing interest for structures exposed to equity downside, which could remain a theme to start the year for some clients.
Our Protect 90 mandate has proven popular with clients in December, especially in France in pension format. We expect a similar dynamic in the UK with three months to go to the end of the fiscal year. The mandate’s main features are proving very timely for corporate cash placement as well given the list of unknowns for markets as we start 2024: liquidity, upside exposure via ETFs, capital protection of 90% and volatility control.