Monthly House Views - The last mile - February 2024

Buoyant economy makes central banks’ job harder. Inflation fell sharply in 2023 but remains above the central banks’ 2% target and the “last mile” could prove a long haul. Resilient economies with robust labour markets are keeping up the pressure on wages and hence prices. In these circumstances, central banks are likely to cut rates gradually as from spring. They would likely rather risk a deeper economic slowdown than risk letting inflation get out of control again. We still think economies will hold up well with the United States continuing to outperform Europe. China's economy, meanwhile, continues to face structural problems; crucially a loss of faith by international investors which is likely to persist in the current geopolitical context.

Strengthening exposure to European equities. Further evidence of economic robustness encourages us to modestly strengthen our risk exposure to equity markets. We maintain our preference to the US markets for the strong economy and high exposure to AI. However, we have also raised exposure to the European market which continues to offer more attractive valuations. We remain Underweight emerging markets as investors remain cautious about China. We have offset the equity strengthening with slightly trimmed exposure to investment grade corporate bonds. We remain constructive on this segment but are taking profits on recent strong gains. Overall, we retain a highly diverse positioning, which has allowed us to catch the rally in equities while retaining protection against any correction.

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