Daily Management Review

Investors Are Leaving Behind The Recession That Did Not Happen


Investors Are Leaving Behind The Recession That Did Not Happen
Big investors are tearing up market playbooks for 2024 based on the timing of a projected recession and interest rate reduction, as the global economy shows surprisingly durable.
They are turning sour on government bonds and moving away from major tech stocks to look for bargains in sectors long plagued by expectations of a downturn that has yet to manifest.
A ferocious bond run that began in October has come to a halt, with good data, particularly last week's US jobs reports, casting doubt on the prospect of swift monetary policy easing.
While red-hot stock markets remain vulnerable to a collapse in rate cut expectations, some money managers anticipate that prolonged economic growth will boost small-cap stocks, banks, and cyclicals, perhaps attracting 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 prefers mid-sized U.S. stocks over major tech and European banks. He prefers stocks over bonds.
With borrowing prices at a 22-year high in the United States and a record high in the eurozone, the market has long predicted that firms would struggle and unemployment would rise, pushing central banks to loosen policy soon.
And the economic picture has clearly weakened: the World Bank forecasted on Tuesday that the world economy is on track for its worst half-decade performance in 30 years, while Germany, Europe's largest economy, is off to a rocky start this year.
However, with U.S. employment solid and consumer mood in Europe rising, the outlook is less bleak than anticipated.
The US economy outperformed forecasts by growing 2.4% last year and is expected to increase 1.2% in 2024, according to a Reuters poll, while the eurozone is expected to grow 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.
Cesar Perez Ruiz, CIO of Pictet Wealth Management, said that low-valued enterprises around the world would become takeover targets as economic statistics remained positive. He was tempted to look for such discounts in the UK's mid-cap FTSE 250 index, he said.
Money markets currently forecast around 140 basis points of interest rate decreases in the United States this year, down from 150 basis points in December, boosting 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.
Benchmark 10-year US Treasury yields are trading around 4%, down from 5% in October. Germany's 10-year Bund yield fell below 1.9% in December, capping its greatest quarterly performance since 2012, before rising to around 2.2%.
Pictet's Perez Ruiz stated that his last deal before leaving for vacation in late December was to sell some of his 10-year Bunds because rate-cut excitement was overstated. He maintains a neutral view on US Treasury securities.
In December, eurozone inflation returned to 2.9%.
Economists expect statistics on Thursday to show a key measure of US inflation fell to 3.8% in December.
Some analysts argue that this is still too high for meaningful monetary easing, particularly if Red Sea supply problems threaten another worldwide inflation spike.
Jason Da Silva, global investment strategy director at London-based Arbuthnot Latham, stated that he would need further proof of inflation approaching 2% before becoming bullish on Treasuries.
The question for stocks is whether they can withstand a no-recession scenario that pulls rate-cut bets right back.
Global stocks, which were up 20% last year, rose the highest in November and December as US inflation slowed and the Fed suggested that rate hikes were over.
"If the economy does hold up better than expected, then that risks creating disappointment since the rate cuts priced might not happen," Deutsche Bank said.
Brown of UBS, on the other hand, stated that if there is no recession, stocks will rise as market gains spread.
Last year's equities rise was fueled by the "Magnificent Seven" group of U.S. tech giants, including Microsoft and Nvidia, which soared on forecasts on long-term growth from AI.
Brown anticipates stronger performance this year from US mid-sized companies in cyclical industries such as minerals, industrials, and finance.
He predicted that European and US banks would gain from "resilient growth, healthy earnings, and elevated, but not surging, interest rates".
According to one Citi measure, global equity investors have entered a so-called stock-pickers' market, in which the macroeconomic outlook does not drive pricing, for the first time since 2019.
Federated's Orlando preferred value equities - those considered as low compared to book value or dividend distributions and now primarily in the banking, consumer, and healthcare sectors - over technology.
"Investors will be attracted to the low P-E (price to earnings) multiples and high dividend yields of these stocks that, frankly, were left for dead last year," he said.