Market Analysis and Investment Insights

• Investors tell us that they will not allocate more to bond investments because rates will stay higher for longer. They also say they will not allocate more to equities because of an impending recession. The inconsistency of these two views is obvious.
• Inflation is a symptom of a sick world economy, one suffering from too much money chasing too few goods and services. That was true of the pandemic period, but it is ending. Inflation’s drop from an 8.7% pace globally in 2022 is just one sign of the world economy healing. While supply shocks remain a risk, demand is moderating, and supply is recovering without a severe economic contraction. This is good news.
• In the US, we see data that shows considerable progress toward normal levels of inflation. Wage growth, for example, is decelerating even in the services sector.
• While not every CPI report will fall below expectations, this week’s soft CPI figures were not a surprise to us. Shelter costs are now coming down in earnest. We expect a material and steady drop for the next 11 months before housing costs start to stabilize towards the end of 2024.

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We would use “three phases” as the likely context for the world financial market outlook.

• In 2020-2021, both equity and bond markets saw strong, stimulus-induced returns despite severe economic weakness and building inflation pressure.
• In 2022-2023, markets reset lower in value, depressed by policy tightening.
• Lower inflation should allow for a more normal functioning of the world economy and markets in 2024-2025. This points to higher returns after two “payback years”.

• A rare event in 2022 leads to potential opportunity in 2024.
• Three Phases potentially position markets for better returns.
• Our updated forecast anticipates recovery within a weak 2024 and then a stronger 2025.
• Critical risk: the security of global oil supply.
• Outlook Theme : Core portfolios offer greater value now.
• The average S&P 500 company is priced for no growth.
• How to play yen strength.
• We are overweight EM Asia ex-China as supply chains shift and the chip cycle bottoms.
• Real yields remain near multi-year highs.
• US IG preferred yields of about 7.5% are higher than HY BB credit, and are at a relatively high premium to senior financial debt.
• Major economies (euro area and China) to show signs of more sustained resilience and the US economy should not slow too much - “US exceptionalism” story is being steadily pared back by the China and euro area economic surprise indexes that have likely hit a cyclical bottom.
• 2023 Singles Day ends with little growth, retail and trade data show signs of bottoming.
• Sluggish policy transmission unable to revive activities.

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