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Expectations Propelled Higher for 2024’s Global Market Performance: March 2024 CIO Market Commentary

March 19, 2024

World growth: Better than expected
SP500 & Nasdaq: New highs
Euro Stoxx 50 breaks all time high, 16 years after the Great Financial Crisis
Hang Seng Tech: Rebounds 14% in February
A.I. investments surging: Regionally diversified “magnificent” opportunities in the US, Europe and China
Rate cuts in 2024: Still time to lock high interest on cash deposits or bonds
US Dollar strength is losing steam: USD Bearish trend versus surging gold, silver and crypto currencies

GLOBAL MACRO: WORLD GROWTH BETTER THAN EXPECTED

World growth remains solid and inflation is decreasing. The FAO Food Price Index has continued its downward trajectory, marking the seventh consecutive month of decline to reach 117.3 index points in February 2024.

In the US, Growth momentum: The US has sustained a robust economic expansion, with growth rates holding steady at 3.1%. Labor market figures have exceeded expectations. The inflation rate was 3.1% in February, driven predominantly by the rising cost of services. The Federal Reserve Chair Jerome Powell conveyed that the Fed is approaching the requisite level of assurance needed to commence reductions in interest rates.

In Europe, Sentiment improving: Sentiment indicators have begun to exhibit signs of stabilization and marginal improvement, although they persist at comparatively low levels. Concurrently, the more tangible economic indicators have continued to show weakness. It is anticipated that the European economy will maintain its current period of lateral movement close to zero growth in the subsequent months. Inflation is projected to regress towards the 2% target over the forthcoming quarters. At its March session, the European Central Bank (ECB) made no adjustments to its monetary policy.

In China, Export and import growth beat expectations: Exports experienced an upturn exceeding forecasts, recording a 7.1% year-over-year increase (surpassing the consensus of 1.9%), attributable to robust demand from emerging markets. Import growth, buoyed by technology and primary commodities, also surpassed expectations, registering a modest 0.2% year-over-year rise against a predicted decline of 2%. The travel and expenditure metrics during the Chinese New Year holiday exceeded those seen in 2019, indicating a strong pattern of consumption. Visitor numbers to Macau and Hong Kong reverted to their 2019 benchmarks.

Economic Trends Year on Year

FINANCIAL MARKETS: GLOBAL EQUITY RALLY CARRIES ON

Global investors currently maintain historically high concentration levels in US assets, particularly stocks and bonds. Diversification across different geographical markets lowers the concentration risk.

Equity: Global equities delivered a total return of 4.3% in February, helped by strong fourth-quarter earnings and optimism about the rapid commercialization of AI. The returns were positive across the regions: S&P 500 +5.2%, Nasdaq 100 +5.3%, Euro Stoxx 50 +4.9%, HSCEI +9.3%, and Nikkei 225 +7.9%. Fixed Income: The 10-year US yield further rose 29bps to 4.25% and the 10-year German yield gained 24bps to 2.42%, while the 10-year China yield edged down 8bps to 2.41%. Amid this “risk-on” mood, High-Yield bond prices declined 0.2% in USD and increased 0.4% in EUR. Currencies: All major currencies declined 0-2% versus the USD as US interest rates rose across the maturity curve and the US Fed signaled a delay in rate cuts. Commodities: Gold increased 0.3% on expectations of central bank rate cuts in 2024. Oil prices rose 3.2% as OPEC continued its production reduction policy.

EQUITIES: RALLY UNDERPINNED BY GROWTH AND DECREASING INFLATION

The rally in global equity markets is persisting, with a return of +4.3% in February. Market conditions are currently favorable, and the expectations for 2024 performance have increased based on economic expansion, receding inflationary pressures, and the prospect of upcoming reductions in interest rates by central banks.

In the US: New all-time high

The S&P 500 returned 5.2% in February (+6.8% year to date), breaking 5,100 and reaching new all-time highs. The stock market has been bolstered by a confluence of factors, including: (1) economic expansion surpassing forecasts; (2) ameliorating inflationary pressures; (3) the cessation of the Fed’s interest rate increments coupled with an anticipated shift towards rate reductions; and (4) a marked escalation in investment directed towards artificial intelligence (AI) infrastructure and its applications.

In Europe: Euro Stoxx 50 breaks all-time high, 16 years after the Great Financial Crisis

The Euro Stoxx 50 returned 4.9% in February (+8.0% year to date), reaching back its all-time high, close to 5,000. The rally of the European stock market can largely be attributed to a group of “magnificent” stocks within the Euro Stoxx 50 index, which comprises high-performing companies such as ASML, Hermès, L’Oréal, LVMH, SAP, and Siemens. The phase of monetary policy relaxation, alongside signs of stabilization in manufacturing activity, provides a tailwind for equity markets. Furthermore, the earnings landscape continues to offer broad-based support.

In China: Stocks rebound 9.3% in February

Since late January, the Chinese stock market has experienced a notable recovery, culminating in a 9.3% gain in February. This resurgence has been largely supported by the government’s intention to purchase equities worth RMB 2 trillion, a 50-basis-point reduction in the reserve requirement ratio, and more assertive regulatory measures. The market has seemingly integrated many of the adverse factors associated with China’s cyclical slowdown and structural challenges into current prices. It is anticipated that policy backing will persist, potentially acting as a propellant for further appreciation in equity valuations.

CURRENCY OUTLOOK: US DOLLAR STRENGTH IS LOSING STEAM

The US dollar is showing potential signs of entering a downtrend in comparison to gold and a surge in cryptocurrencies. Bitcoin’s value has escalated to a historic peak of $70,000, spurred by market anticipation of forthcoming rate cuts by central banks, as well as robust demand for Bitcoin ETFs. We note that Bitcoin is also benefitting from the recent introduction and rapid adoption of spot Bitcoin ETFs on Wall Street. Concurrently, the US national debt is expanding at a rate of $1 trillion every 100 days, which is catalyzing trades based on ‘debt debasement’, with assets like gold reaching highs of almost $2,200 per ounce and Bitcoin hitting the $70,000 mark.

EURUSD: At 1.0925, close to the top of the [1.05; 1:10] range

The EURUSD pair declined in February. This shift was influenced by reduced expectations of an early Fed interest rate cut following unexpectedly high US inflation figures. Escalating geopolitical tensions in Ukraine and the Middle East, coupled with disappointing economic indicators, contributed to the euro’s depreciation. The ongoing economic weaknesses within Europe may lead to further weakening of the EURUSD in 2024 towards 1.05, the lower bound of its trading range.

USDRMB: At 7.20, stuck in the [7.00; 7:30] range

The yuan is stabilizing at 7.20 against the dollar. Chinese officials are expected to intervene to stabilize the currency as part of broader efforts to bolster economic recovery. The yuan has been underpinned by expectations of more decisive policy actions to support Chinese financial assets. Consequently, it is advisable for companies with exposure to the RMB to implement hedging strategies to mitigate the risk associated with currency volatility.

USDJPY: At 147, increasing downside volatility

USDJPY is moving down from its all-time high of 152, as the market anticipates the Bank of Japan (BoJ) to normalize its monetary policy and step out of its negative rate policy. The central bank has recognized an increasing probability of meeting its 2% inflation target as the cycle of price and wage inflation gains momentum.

FIXED INCOME: RATE CUTS IN 2024. STILL TIME TO LOCK HIGH INTEREST ON CASH DEPOSITS OR BONDS

We believe there is still a window of opportunity that we have not seen in the past 20 years where it is possible to receive substantial income from cash deposits, with duration of 3 to 6 months (5.50% in USD and 4% in EUR). High interest rates can be locked for longer periods by investing cash in bonds from large investment grade banks, which can provide an income per annum from 5% to 6% net in USD or 4% to 5% net in EUR, with a duration of 3 to 10 years.

In February, US bond yields have escalated, particularly in response to the US consumer price data, which presented an unanticipated uptick in both headline and core inflation figures. Fed officials have suggested that a reduction in interest rates is conditional to substantial evidence indicating that inflation is steadily returning to the its 2% target rate. Meanwhile, the yield on the 10-year US Treasury note has reached 4.25%.

In Europe, the ECB left its policy unchanged at its March meeting, but lowered its inflation and growth forecasts, committing to keep rates at restrictive levels until inflation aligns with the 2% target. The yield on Germany’s 10-year bond has reached 2.42%.

The yield on China’s 10-year government bond edged down to 2.41%, close to the lowest rate seen in more than twenty years. This sustained low yield comes amid persistent deflationary trends within the Chinese economy, which continue to underpin expectations for further monetary easing measures.

COMMODITIES

Gold: Reached all-time high close to USD 2,200

Gold appreciated nearly 19% from its October low. Three factors are contributing to this uptrend:

(1) The Fed is poised to lower interest rates, a move historically favorable for gold prices. (2) Sustained acquisitions of gold by central banks and investors are likely to lend additional support. This trend is underscored by global central banks’ purchases exceeding 1,000 metric tons annually over the past two years, marking the most substantial accumulation since the 1960s. (3) Escalating geopolitical tensions are expected to further bolster the appeal of gold as a safe-haven asset.

Gold continues to be an effective portfolio diversifier and we expect to see investor demand for gold accelerating. Consequently, we expect gold prices to remain well supported in 2024.

Oil: Price increased 10% year to date to USD 80/barrel on OPEC+ production cut

The oil market sentiment continues to be tempered by concerns over Chinese demand, even as OPEC+ decisions to maintain supply cuts have led to a 1.4 million barrels per day contraction in global output. Ongoing production restrictions by OPEC and sanctions affecting Russian exports have kept supplies tight. Additionally, China’s reduced oil importation, which saw a 5.7% decline to 10.8 million barrels per day in the early months of the year from 11.4 million barrels per day in December, has compounded worries about demand.

RISKS

War escalation in Ukraine or the Middle East: These conflicts hold significant implications for Europe. Specifically, if Russian forces were to advance across the Belarussian border, 150 kilometers north of Kyiv, this could precipitate a rapid devaluation of EURUSD, potentially driving it towards the 0.90 threshold. Furthermore, statements made by former US President Donald Trump concerning a potential withdrawal from NATO commitments have notably undermined the confidence of US allies.
US-China tensions: US-China friction remains strong, with increasing tension around Taiwan and the South China Sea.
Recession: So far, the US has escaped recession although growth has been tepid, while in Europe anticipated growth is close to zero. By contrast, Asia is experiencing stronger, sustainable growth, fueled by China’s slowing, yet substantial growth (close to 5% in 2023).

OPPORTUNITIES

Income from safe cash deposits: Cash can be safely placed in cash deposits and earn annualized net interest, e.g. over a period of 6 months: 5.25% in USD, 4.00% in EUR, 5.00% in GBP, 4.00% in AUD.
Income from Investment Grade bank bond Issuers: Major banks are implicitly protected by central banks as demonstrated in the Credit Suisse crisis where actual bonds (not AT1) remained secured. Investors can benefit from the substantial yield of a diversified bank bond portfolio of 3 to 10-year duration: close to 6% in USD, 4.5% in EUR, 5.5% in GBP.
All-time high, compelling “risk premium” for Chinese stocks: We believe that Chinese stocks’ historically low prices are an opportunity for long-term investors looking for asset growth, substantial income, and de-correlation with Western markets. Given attractive equity valuations and earnings upgrade expectations, we believe mainland Chinese and Hong Kong equity valuations are likely to increase significantly within the next 12 months.
Japanese yen: The JPY is extremely undervalued, with USDJPY close to its all-time high of 152. The anticipated change in BoJ’s monetary policy in 2024 could trigger a rapid yen re-appreciation of 20%.
Nuclear energy: We believe the nuclear sector will be instrumental in the world’s decarbonization efforts. To achieve fossil fuel reduction targets, the nuclear power industry’s safety standards need to be brought to the next level, for instance by using new technology to recycle uranium. New “green” nuclear energy is the number one priority of President Macron in France, while being high on the agenda in the US and China, which will build 150 nuclear power plants in the next 15 years.
Defense and security: The wars in Ukraine and Palestine have triggered massive investment in military defense and the overall security sector – including cyber, food, energy, and semiconductor supply security – in Europe and around the world.