Monthly House Views -Keep calm and carry on! - December 2023

New investment opportunities arising from this year’s rise in interest rates. Financial markets have been shaken all year by movements in yields in different maturities. The year began with central banks hiking policy rates to curb stubborn inflation. By late summer tensions were being further stoked on mid- and long-term yields particularly by the booming US economy, which raised fears of persistent inflation, and by concern over public finances, again focused on the US. These pressures have now dropped away amid signs inflation may at last be under control. This creates a great opportunity to add exposure to bond markets and capitalise on the “calmness” and especially on the “carry” offered in fixed income products by the new interest rate levels.

Next year: soft economic growth and gradually dwindling inflation. In 2024, we see the economy slowing further as the fiscal stimulus is further wound down and the lagged impacts of tighter monetary policy feed through. The adjustment will be mitigated by stubbornly strong labour markets and softer inflation which will restore household purchasing power. The US economy should continue to hold up better than the euro zone and the UK. In this environment, central banks should gradually loosen monetary policy from early summer, once they are sure core inflation is under control.

Reinforcing our exposure to bond markets. This seems to us an ideal environment to buy into investment grade corporate bonds. Companies still have strong balance sheets and are paying high returns.  As well as adding to these positions, we retain a highly diverse global positioning, which has allowed us to catch the rally in equities while retaining protection against fresh turbulence. We particularly like the US equity markets which can ride their better economic prospects. We have moved to Neutral on Japanese equities where momentum is looking stronger. Lastly, we have changed our dollar Overweight against other leading currencies to Neutral as we do not see wide divergence in major central banks policies ahead.

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