In retrospect, November 2023 emerged as the standout month for market performance, witnessing significant gains across various asset classes. Notably, the Bloomberg Aggregate Bond Index posted a total return of more than 4%, while global stock markets increased by more than 9% (MSCI World All Country Index). The sharp turnaround was driven by rapidly falling inflation, bolstering the belief that the tightening cycle has concluded. Although initially concerned about rate hikes, investors now anticipate a series of impending rate cuts in 2024, with the market pricing in a high chance of a first rate cut in the second quarter. While we agree with this assessment, we anticipate it will coincide with a slowdown in growth and negative earnings revisions.
We have seen markets interpreting "bad news" on the economy as "good news" for financial markets, fueling hopes that central banks will start cutting interest rates and thereby lifting stocks. However, at some point, "bad news" for the economy can quickly translate into negative consequences for markets, especially when slowing growth affects employment and corporate profitability in a manner that rekindles fears of recession. So, economic data must walk a fine line in the following quarters to sustain the favourable market environment.
The robust market performance has raised investors' expectations for 2024. While there is potential for positive developments in the upcoming year, it's also essential for investors to acknowledge the challenges faced by an economy under strain. Markets are priced for the optimal outcome (soft landing). While the profit picture is improving, valuations leave little room for error.
Tighter lending standards and a still very restrictive monetary policy continue to transmit in the real economy and will exert downward pressure on growth and corporate fundamentals. Against this backdrop, we stick to our cautious positioning with a preference for high-quality bonds. Even while we remain underweight equities, they remain a fundamental component of a long-term portfolio. The past year reminded us that market shifts can occur rapidly and dramatically. The year 2024 will be no different. In this context, maintaining diversification will be crucial to navigating various macroeconomic scenarios and seizing opportunities as they present themselves.
Please find attached our last Asset Allocation Update for December.