Big investors are tearing up market playbooks for 2024 based on timing an expected recession and interest rate cuts, as the world economy proves surprisingly resilient.
They are turning lukewarm on government bonds and away from big tech shares to bargain-hunt for stocks in sectors long hit by fears of a downturn that has yet to materialise.
A blazing bond rally that began in October has stalled as strong data including last week’s U.S. jobs numbers shake expectations for rapid monetary policy easing.
And while red hot stock markets remain vulnerable to any collapse in rate cut bets, some money managers believe sustained economic growth will buoy up small-cap shares, banks and cyclicals and could sweep cautious money back into equities.
“The surprise this year is probably that (economic) growth comes in once again,” said Evan Brown, head of multi-asset strategy and portfolio manager at UBS Asset Management.
Brown favours mid-sized U.S. stocks outside big tech and European banks. He prefers stocks to bonds.
Market gospel has long been that with borrowing costs at a 22-year high in the U.S and a record peak in the euro zone, businesses would struggle and unemployment rise, prompting central banks to quickly ease policy.
And the growth outlook has undoubtedly weakened: the World Bank on Tuesday forecast the global economy is heading for its worst half-decade performance in 30 years, while Germany – Europe’s biggest economy – is having a bumpy start to the year.
But with U.S. employment strong and consumer sentiment in Europe improving, the outlook is less dire than feared.
The U.S. economy confounded expectations to grow 2.4% last year and is seen expanding 1.2% in 2024, a Reuters poll showed, while the euro zone is expected to have grown 0.5% in 2023.
“The footprints of money will guide you into the (stock) market instead of waiting on the sidelines worrying about this recession we never had and might not have for some time,” said Ken Mahoney, president of Mahoney Asset Management.
Pictet Wealth Management CIO Cesar Perez Ruiz said that with economic data holding up, low-valued businesses worldwide would become takeover targets. He was tempted to hunt for such bargains in the UK’s mid-cap FTSE 250 index (.FTMC), he said.
Money markets now predict roughly 140 basis points of U.S. rate cuts this year, compared with 150 bps in December, a revision that has boosted the dollar.
“We are expecting a soft (economic) landing rather than an outright recession and the Fed to be much more conservative in cutting rates than the consensus believes,” Federated Hermes chief equity strategist Philip Orlando said.
