LGT Private Banking House View

January 2024 - in a nutshell

Global growth rolls into 2024 in a sluggish pace, leaving the burden of driving market optimism to disinflation and hopes for "sooner" and "sharper" interest rate cuts. While the probability of our current "high for longer" base case has indeed receded, we still think it will take a prolonged period of monetary restrictiveness to truly fulfil central banks’ inflation mandates. We remain "Neutral" on equities and government bonds, while keeping an "Underweight" in high yield credit.

Date: 10 janvier 2024
Auteur: Gérald Moser, CIO & Head Investment Services Europe
Temps de lecture: 7 minutes

The year 2023 closed with a strong rally in equities and bonds which took many market participants by surprise, including ourselves. Lower-than-expected inflation prints both in Europe and in the United States, a Federal Reserve meeting in December with a relatively dovish stance and resilient growth led both equity and bond markets to price an almost perfect outcome: no recession and many rate cuts from central banks as inflation is swiftly back on target in 2024.

But we believe that the path towards rates’ normalisation is going to be bumpier than markets assumed in December. The latest US employment figures suggest that growth remains resilient. With inflation still not at the official target of 2%, there is little incentive for central banks to start cutting rates as early and as aggressively as capital markets are currently expecting.

In this respect, the first half of 2024 is likely to be similar to the second half of 2023: data-driven financial markets with a focus on the balance between inflation and growth, as well as ongoing issues on the geopolitical front and technicals will play a significant role, especially in fixed income markets.

In this environment, we are "Neutral" on equities and government bonds, the two largest asset classes. The rally has pushed equity valuations to stretched levels, based on earnings expectations that appear overly optimistic for the time being. We still expect economic growth to slow down and equity growth to be in the low single digits at best.

In fixed income, we continue to see high yield credit as not adequately compensating for the risks of holding it. We remain "Underweight" in this asset class. While we are tactically "Neutral" on government bonds, we are strategically positive on the asset class. We prefer long duration in this part of the fixed-income market.

On the currency side, we argue that the current weakness in the US dollar has gone too far. It would not be a surprise to see a pause and even a strengthening of the greenback in the short term. Finally, we remain "Neutral" on gold. While the precious metal should find additional support in 2024 from easing real rates and ongoing geopolitical issues, the recent strong performance suggests that a pause in gold’s performance is likely.

Macroeconomic environment

Global growth rolls into 2024 at a sluggish pace, leaving the burden of driving market optimism to disinflation and hopes for "sooner" and "sharper" interest rate cuts. Continuing disinflation indeed warrants some optimism that central banks might already achieve price stability sooner than feared, providing potential tailwind for risk assets over the course of 2024. While the probability of our current "high for longer" base case has indeed receded, we still think it will take a prolonged period of monetary restrictiveness to truly fulfil central banks’ inflation mandates. Major central banks will probably choose to err on the "too tight" side as long as growth - even if weak - does not collapse and unemployment dynamics stay contained.

Investment strategy

Equity markets ended the year with a strong rally. The move was not a reflection on stronger growth, but rather a sharp repricing in interest rate expectations following lower than expected inflation prints. We remain "Neutral" on equities and government bonds, while keeping an "Underweight" in high yield credit. Short-term asset class returns are going to be very data dependent, but tactical opportunities should emerge from this volatile environment.

Equity strategy

After the spectacular year-end rally, the equity markets start the new year with a somewhat euphoric investor sentiment, technically overbought conditions and elevated valuation multiples. Also, 2023 ended with low volatility levels, the likes of which we last saw before the pandemic. We expect the new year may start with some sort of consolidation, digesting the latest moves, which may happen either over time (trending sideways) or price (some pullback). However, at the same time, seasonality stays supportive and the key drivers for markets remain in a fragile balance between weakening growth on the one hand and a potentially more supportive monetary policy backdrop on the other. For this equity market, which is highly data dependent in the near term, we maintain an overall "Neutral" stance.

Fixed income strategy

Following the sharp decline in long-term government bond yields in recent months, we believe a temporary countermovement is possible. With the exception of the high-yield segment, where we avoid the financially weakest issuers, we are currently "Neutral" in all other fixed income segments. What remains constant are our preferences within these segments. In credit, for example, we favour shorter-dated bonds from investment-grade issuers, while in government bonds we continue to focus on longer-than-average maturities.

Currency strategy

We have correctly predicted a weaker US dollar in the fourth quarter of 2023, especially as the Japanese yen has strengthened against the greenback. Additionally, the euro rebounded nicely, exceeding our expectations. However, we believe that this upward movement might have been too rapid and we anticipate a temporary strengthening of the US dollar. We have also raised our gold price again. We believe that factors such as stable yields and geopolitical uncertainties could well support a sustained rise in gold prices.

Alternatives

Factors such as yield stability and geopolitical uncertainty will support sustainable gains in gold prices in our view. We have therefore raised our gold target once again. Investors widely view gold as a safe haven, and it is no surprise that the precious metal has remained an attractive asset in recent years. Global geopolitical tensions, particularly those stemming from conflicts in Ukraine and the Middle East, have heightened concerns. As a result, gold has seen a significant increase in its price since the Hamas attacks on Israel began.

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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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Country-specific information

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