Geopolitics: “it’s complicated”
“Half of the world is voting next year… the US is a risk… and we see polarisation in Europe… in Germany, the Netherlands, France, Italy and Belgium with their associated risks,” said Vincent Juvyns, global market strategist at J.P. Morgan Asset Management in Luxembourg during an interview on 7 December 2023.
Questioned by Delano on the signals sent by the meeting between Saudi Arabia’s de facto leader Mohammed bin Salman Al Saud, also known as MBS, and Vladimir Putin, Juvyns suggested that the Saudis are pragmatic as they are busy diversifying their economy while avoiding upsetting the world with too elevated oil prices. “They are well aware that too-high oil prices will result in restrictive monetary policies pushing the economies in recession with a reduction in demand for oil.”
While it is not in the interest of the Saudis to maintain elevated oil prices, Juvyns thinks that the recent cuts in production were “aimed at maintaining oil price at around $80 to balance their budget.”
Should the Fed reduce its rates in 2024?
Juvyns assessed the increasing inversion of the curve as an expectation by the market of a deeper recession. JPMAM expects a significant slowdown in 4Q23 GDP to 2.0%, down from the revised figure at 5.2% in 3Q23 due to the lag effects of higher interest rates that should negatively impact consumer spending. The investment firm expects GDP growth of 1.6% in 2024 against 2.5% in 2023.
“If the Fed does not think that that the economy gets into trouble, there is no reason to reduce rates,” he said. Moreover, he does not think that inflation slowly reaching its target is a sufficient reason to reduce the Fed rates.
Juvyns commented that a reduction in rates would require a significant rise in the unemployment rate and consumer spending to falter. This is not the base case at JPMAM.
A range-bound market remains attractive; if rates go up a bit, the total return is positive and if rates are moving down, the total return is even more positive
“With the US 10-year rates reaching 4.2%, not many investors are jumping in anymore,” said Juvyns. Moreover, he is concerned about the upcoming issuance of US Treasury bonds given the absence of the Fed and the lack of appetite of foreign investors, including Japanese investors, should the Bank of Japan continue to normalise its rates policy. He also noted that decisions by the Japanese investors have an impact over global bond markets, more generally.
The pressure will be accentuated by the large issuance of sovereign and corporate debts all putting pressure on government rates. “Stock of equity issuance is also pilling up for 2024… and the $175bn Space X IPO is a case in point.” Consequently, he expects the US 10-year rates to trade in a range-bound between 4.2% and 4.7%, “not 7% as Jamie Dimon [the CEO of JP Morgan] is expecting… until the second quarter of 2024.”
“A range-bound market remains attractive; if rates go up a bit, the total return is positive and if rates are moving down, the total return is even more positive,” stated Juvyns.
Asset classes likely to suffer
“Given the recent equity rallies, they are therefore at risk…with significant optimism already priced in.” One must account for a slowdown of the world economy with its inevitable effects on turnover and profit which will continue to be under pressure from higher interest charges.
Consequently, JPMAM will stay “defensive” with a focus on companies with large capitalisation and Juvyns thinks that the recent rally in small caps has probably “gone up too fast,” as they are more sensitive to the economy’s slowdown and to higher interest rates.
He thinks that “the large caps that boosted the S&P500 or the Nasdaq display reasonable valuations at less than 30 times earnings” and is justified by the impact of artificial intelligence on the economies and their prospective earnings. They are also seen as “defensive.”
On credit products, “As for most market strategists, we continue to favour investment grade credits despite their underperformance against non-investment grade companies in 2023.”
Relatively calm waters for rates in Europe
Juvyns thinks that the European Central Bank will be the first to reduce its rates in the western world as the European economies are the most at risk, but it is premature to expect this to happen in 1Q24.
On long rates, he also expects them to stay range-bound +/-20bps around 2.20% for the German 10-year bunds as the current level already reached JPMAM’s target for 2024.
Lock in yields as soon as possible as rates will most likely be lower in a year
He thinks that French bonds are a better representative for Europe as the country is considered as “soft core.” As for the 10-year bund, its rate came down to 2.8% more rapidly than expected against a “neutral rate of 2.6%. A range-bound +/-20bp volatility should also be expected in the coming six months.
Stagnation is expected in the eurozone
GDP expected to stay flat in 4Q23 as most advanced indicators did a poor showing in the last several weeks. This absence of growth in the fourth quarter will translate into a GDP growth of 0.5% for 2023. JPMAM expects 2024 to be even slightly worse at 0.4% blaming the poor economic performance, the lack of investments and the trend of budget discussions in Germany.
Cash may not remain king
“You date cash, but you don’t marry cash… and staying in cash in 2024 will be a big mistake,” said Juvyns. He noted that many investors regret not locking-in rates when back-end rates were near 5%. “Lock in yields as soon as possible as rates will most likely be lower in a year.”
China is unlikely to be back in 2024
“Consumer confidence is at a very low level and there are no outside catalysts to boost it.” Should the government introduce new measures, Juvyns thinks that it will not take much for investors to come back. “Given the low level of flows, not much (such as the return of the domestic investors) is necessary to spark a rally.”
However, a return of foreign investors is not expected given the poor macroeconomic developments, ongoing real estate issues and the lack of fiscal accommodation to ease consumer spending. Consequently, JPMAM expects GDP growth of 5.2% for 2023 and 4.9% for 2024.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .