LGT Private Banking House View

February 2024 - in a nutshell

Major asset classes have started the new year on diverging paths without pricing in a uniform macroeconomic environment for 2024. To hedge against the risk of a hard landing, we would prefer government bonds with longer maturities. Overall, we consider the opportunities and risks to be balanced and maintain our neutral rating for equities.

Date: 31 janvier 2024
Auteur: Gérald Moser, CIO & Head Investment Services Europe
Temps de lecture: 7 minutes

The year 2024 has started very much the same way 2023 ended: geopolitics continue to dominate the headlines and central banks are attracting a lot of attention, while financial markets continue to focus heavily on short-term inflation and economic data.

Against this backdrop, we decided to take a look at what different asset classes were pricing in. While equities are pricing in a near-perfect scenario - fast receding inflation combined with double-digit earnings growth - bond markets are expecting five to six rate cuts by the US Federal Reserve, which seems only consistent with a hard landing on the economic side. Our own conviction is that there will be a buying opportunity in equities, but we prefer to be "Neutral" for the time being. Regarding government bonds, we have a similar view and think the asset class is likely to become more attractive again.

Our macroeconomic article offers a comparison of the economic performances of the United States and Europe. We observe that per capita productivity has grown much faster in the US than in Europe since 2010, and that this trend has only accelerated in the years since the pandemic. On the currency side, we express a positive stance on the JPY. The yen is currently trading at historically low valuations. Considering the divergent dynamics in terms of monetary policy - the US Federal Reserve plans to cut interest rates, while the Bank of Japan is expected to start raising rates - this creates a supportive backdrop for the JPY to appreciate against the USD.

Regarding equity markets, our article focuses on the recent performance of the S&P 500 and the Japanese stock market. It also examines the commodities sector, providing insights into current market trends and potential investment opportunities. In this regard, we continue to see opportunities in gold mining companies. The recent divergence from the gold price is extremely rare and the positive catalysts we identified as drivers at the time of our positive call on gold miners remain intact. Finally, when it comes to fixed income, we reiterate our expectation that the curve is likely to steepen in an environment where yields appear set to fall. We see limited potential at the long end and would prefer the three to five year government bond segment, which offers a combination of attractive yields and potential price gains from falling interest rates.

All in all, we are "Neutral" on major asset classes. Within each class, we express our convictions where we see investment opportunities.

Macroeconomic environment

While financial markets tend to be poor indicators of fundamentals in the short to medium term, the gravitational force of fundamental data has a clear impact over the long term at the latest. Beyond the long-term structural view, the medium-term economic cycle has recently turned against Europe. While much of the widespread pessimism about Europe is justified given the fundamental divergence, it should be emphasised that long-term economic and financial opportunities may emerge once the "capitulation" in economic sentiment ends, and general conditions finally improve.

Investment strategy

Financial markets seem to start 2024 with different views embedded in different asset classes. While equity markets are focused on a goldilocks scenario with optimistic economic assumptions, fixed income markets are focused on rapid inflation decline and a potential hard landing on the economic side. The monetary decisions from the Fed will likely continue to drive overall asset performance in 2024, but the state of the economy will also play a role in the direction markets will move in. For the time being, we are "Neutral" on equities and government bonds.

Equity strategy

The leading S&P 500 index has climbed to a new all-time high. The driving force behind this is a sustained expansion in valuations, especially in the technology sector. Meanwhile, the broader-based Russell 2000 is trading far behind. In Japan, the indices are also approaching a new all-time high after approximately 34 years. Structural advantages such as a much more shareholder-friendly corporate policy are offset by new risks of a possible monetary policy trend reversal by the Bank of Japan and thus potentially more headwinds from the currency front. Overall, we consider the opportunities and risks to be balanced and are maintaining our "Neutral" view on equities.

Fixed income strategy

Following the sharp fall in long-term government bond yields in the last few weeks of 2023, we believe that a certain amount of countermovement is likely. Apart from the high-yield segment, where we are avoiding the weakest issuers, we are currently "Neutral" in all other fixed income segments. For government bonds, we prefer the three to five year maturity range where we expect the best risk/return profile, while for corporate bonds we would go a little shorter in order to limit credit risks. To hedge against the risk of a hard landing, we would prefer government bonds with longer maturities.

Currency strategy

Our market assessment reveals that the Japanese yen (JPY) is currently at historically low valuations, making it an attractive choice. In addition, differences in external economic fundamentals favour the JPY over the US dollar. Regarding monetary policy, the US Federal Reserve’s plans to reduce interest rates and the anticipated rate hikes by the Bank of Japan create a scenario where the USD is expected to weaken against the JPY. Finally, with yields in the US potentially stabilising, there is optimism for a sustained JPY appreciation.

Alternatives

Geopolitical tensions have increased uncertainty in the capital markets and gold’s diversification role remains important. Investors continue to view the precious metal as a safe haven, so it is not surprising that it has remained an attractive asset in recent years.

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Risk information for single stock/single bond recommendations

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If this analysis was made available to any issuers mentioned in the publication prior to its distribution or publication, no changes were made to the price or rating after the issuer’s feedback. Important references for Liechtenstein can be found in articles 3 to 6 FinMV [Financial Analysis Market Abuse Ordinance], for Switzerland in the Swiss Bankers Association Directives on the Independence of Financial Research, and for Austria in section 48 BörseG [Stock Exchange Act], the Austrian analysis principles of the Österreichische Vereinigung für Finanzanalyse und Asset Management [Austrian Association for Financial Analysis and Asset Management, ÖVFA] and the Austrian Society of Investment Professionals (ASIP) and the Standard Compliance Code of the Austrian banking sector. A history of all ratings and recommendations is available at your LGT relationship manager.

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Reference regarding valuation rates

Unless otherwise stated or specified, the rates used in the analysis are normally the share prices provided by the news agencies Reuters and/or Bloomberg at the close of the stock exchange of the domestic market of the analyzed security or the relevant principal market of this security on the respective local stock exchange on the eve of the day of compilation.

Explanation of investment recommendations for stocks

We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).

Reference regarding share valuation basis: The analysis compiled by LGT Bank (Switzerland) Ltd. are essentially based on secondary research relating to fundamental and quantitative analysis. Generally accepted valuation methods (valuation multiples, return figures, sector comparisons, comparisons with past valuations etc.) are used for this. The forecasts for the quantitative analysis are prepared with the help of mathematical-statistical procedures (see statements above concerning the analysis tool “theScreener”). Economic indicators such as interest rates, currencies, commodity prices and assumptions relating to the economy are included in the overall assessment. The mood of the market also affects the company valuation. Moreover, many of the approaches are based on estimates and expectations that may change quickly and without warning, depending on developments specific to the industry. Therefore, the recommendations derived from the analysis can also change accordingly. The investment judgements generally refer to a period of 6 to 12 months. However, they are also subject to market conditions and represent a snapshot of the situation. They may be achieved more quickly or more slowly or be revised upwards or downwards.

Explanation of investment recommendations for bonds

We employ both qualitative and quantitative methods to derive our recommendations, which are to be seen as relative to sector/quality peers among comparable maturities. “Buy” and “Sell” recommendations demand a qualitative in-house analyst opinion, in which we incorporate both historical and projected financial results and credit metrics as well as past and anticipated company and sector-specific observations and trends. We recommend “Buy” for a security for which we expect a strong relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Sell” if we expect strong relative underperformance compared to sector/quality peers among comparable maturities. The ratings “Attractive”, “Hold” and “Unattractive” can be based purely on a quantitative approach, which includes the market price of credit risk, valuation of equities and associated instruments, corporate leverage, liability structure, size, and agency rating. We recommend “Attractive” for a security for which we expect a relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Hold” if we expect an average performance compared to sector/quality peers among comparable maturities. We recommend “Unattractive” if we expect a relative underperformance compared to sector/quality peers among comparable maturities.

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Definition of rating categories of S&P and Moody’s which are relevant for us:

AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates

For more information on our methodology for bonds, please contact your LGT relationship manager or your local LGT Group company.

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