MacroResearchBoard

An Upbeat Global Outlook: Too Bad It Is Already Discounted – January 8, 2024

A just-published report noted that after their big year-end run-up, capital markets are priced for a near-perfect economic and inflation outcome. While the macro backdrop of steady global economic growth, falling inflation and anticipated central bank rate cuts will be positive for both stocks and bonds, it is already discounted in asset prices. One consequence of this aggressive front-running is that more frequent than normal tactical allocation shifts may be necessary this year.

Both risky and risk-free assets are vulnerable to eventual disappointment because markets are now overly optimistic about the potential for policy rate cuts this year. Thus, neither global equities nor G7 government bonds are compelling, such that we recommend neutral exposure on each within a multi-asset portfolio, and remain overweight cash. Bond yields will ultimately move higher as investors unwind aggressive Fed rate cut expectations and inflation proves stickier-than-expected: we have now instituted a downgrade bias on G7 government bonds and made some modifications to our recommendations on DM and EM credit.

Earnings should continue to provide support to equities, but de-rating risk will increase when bond yields have another leg up, with expensive U.S. tech and tech-related stocks most vulnerable. Within global equities, we continue to favor EM (ex-China), the euro area and Japan, and have a mild underweight on the U.S.