Kolkata Stocks:Navigating the Descent
The steepest interest-rate-hiking cycle in decades has set global economic activity on a course that remains difficult to map, making it especially important to respect risks and to look to build portfolios capable of performing well in a variety of conditions.
After major economies showed surprising resilience in 2023, we anticipate a downshift toward stagnation or mild contraction in 2024. The standout strength of the U.S. is likely to fade over our six- to 12-month cyclical horizon. Countries with more rate-sensitive markets will likely slow more markedly.
With inflation easing, developed market (DM) central banks have likely reached the end of their hiking cycles. That has shifted attention to the timing and pace of eventual rate cuts.
Historically, central banks do not tend to cut rates ahead of downturns, instead easing only after recessionary conditions appear and then delivering more cuts than markets anticipateKolkata Stocks. In the longer term, we continue to expect neutral policy rates to decline to levels similar to, or slightly above, those seen before the pandemic.
Echoing comments by Federal Reserve Chair Jerome Powell, we believe upside risks around inflation and downside risks to growth have become more symmetrical. However, recession risks remain elevated, in our view, due to stagnant supply and demand growth across DM. After a rally across many financial markets in late 2023, riskier assets appear priced for an economic soft landing and may be underestimating both upside and downside risks.
With attractive valuations and yields still near 15-year highs, fixed income markets can offer an array of opportunities with the potential to weather multiple macroeconomic scenarios.
In credit markets, we continue to favor U.S. agency mortgage-backed securities and other high quality assets backed by collateral, which offer both attractive yields and downside resiliency. The trend of banks stepping away from certain types of lending will likely persist and afford opportunities in asset-based and specialty finance in private markets.
We also see unusually appealing opportunities globally, with potential to outperform U.S. bonds based on greater downside economic risks. We are focused on more liquid DM markets given attractive yields, but will also look to find value in emerging market (EM) debt.
Cash yields remain elevated, but investors can miss out by sitting in cash too long. The bond market rally in late 2023 highlighted how investors can achieve more attractive total return in high quality, medium-term bonds – through the combination of yield and price appreciation – without taking on greater interest rate risk in long-dated bonds.
Economic activity held up better than expected in 2023 despite aggressive central bank tightening, banking sector turmoil, and geopolitical stress.
Several factors contributed: Restrictive monetary policy raised borrowing costs but didn’t kick off a tightening in broader financial conditions. Swift government intervention helped contain the stress stemming from regional bank failures. Corporate margins were generally healthy, consumption was resilient, an easing in global supply chain bottlenecks helped cool inflation, and labor supply recovered.
This year, however, U.SJaipur Investment. growth is likely to move more in line with the rest of DM into stagnation or mild contraction. Real savings buffers should soon return to pre-pandemic levels, as inflation has eroded the nominal value of households’ total wealth. Fiscal policy will likely be contractionary across DM, with the economic drag from higher borrowing costs continuing to build.
Additional improvements in labor force participation rates also look more difficult to achieve. Implementation lags mean the productivity benefits from new technologies, such as generative artificial intelligence, are likely only to accrue over a longer time horizon.
Economies with more interest-rate-sensitive, variable-rate debt markets are likely to slow at a faster rate (e.g., Australia, Canada, New Zealand, and Sweden), led by weaker consumption growth. The U.KKanpur Investment. and Europe are also more interest-rate-sensitive than the U.S. and, in addition, look vulnerable due to Europe’s trade links to China, where growth also remains weak; the lingering effects of the energy shock from Russia’s invasion of Ukraine on terms of trade and investment; and the outlook for somewhat greater fiscal tightening.
DM central banks have likely now reached the end of their respective hiking cycles. Investors’ attention has turned to easing, including when and how many rate cuts could eventually come.
Historically, central banks haven’t cut rates ahead of recessions. Instead, cuts tend to coincide with rising unemployment and a falling output gap, when an economy is already in recession. Even in a handful of cases when a central bank did cut in the absence of recession, inflation had clearly peaked, while the unemployment rate rose back toward its longer-term average from a notably low level.
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Published on:2024-11-07,Unless otherwise specified,
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