Investment Monthly
Soft landing?
05 February 2024
Key takeaways
- We prefer a defensive positioning in investment portfolios. Despite a strong run for equity markets, economic headwinds and disinflation should be supportive for government bonds and challenge corporate earnings
- Generally, we see good opportunities in selective areas of global fixed income. We think “bonds are back” and that a higher term premium means that that duration risk is being rewarded again
- Economic pressures and an uncertain outlook for corporate earnings mean that we maintain a bias to quality and selectivity in stocks and credits, with areas of IG credit offering equity-like returns for bond-like risk
Macro Outlook
- Inflation continues to fall towards target levels in the US and the eurozone. Strength in the US economy, and fears over sticky inflation, mean the Fed will want to see more evidence of cooling before easing policy
- Tight financial conditions in developed markets present risks to a successful ‘soft landing’, especially if labour markets begin to weaken and consumption falls. European economies are already stagnating or contracting
- While many emerging markets continue to see lacklustre growth, there are areas of optimism, especially in the structural and cyclical growth stories that exist in Asian EMs like India
Policy Outlook
- The US Fed has dialled back expectations of near-term rate cuts, with eurozone and UK policymakers also expressing caution. However, we believe that persistent disinflation will ultimately lead to rate cuts from Q2
- We believe the path to a painless soft landing remains challenging. Geopolitical tensions, regional conflicts and global trade disruption are also headwinds for policymakers in both developed and emerging markets
- We think we are embarking on a new economic regime that will see 2 per cent inflation become more of a floor than a ceiling, and fiscal policy play a more important role in economies, leading to higher inflation and interest rates