Summary
Eastspring’s multi asset team expects global growth in 2024 to slow, with the risk of a US recession remaining over the next 6 to 12 months. While inflation has been sticky, the team sees lower inflation in the US from mid to late 2024. They are positive risk assets in the short term but expects a more meaningful slowdown in US growth to drive equity valuations lower over a 12- month horizon.
Market update
Equities: Global equities continued to rise in March. MSCI US rose by 3.20%. Notably, the new Gang of Four (including Nvidia, Microsoft, Meta Platforms, and Amazon.com) contributed to 47% of the YTD return. European markets also posted decent performance with MSCI Europe up 3.9%, as the ECB signaled that rate cuts are on the way. Japan equities rose 3.2% as a weak yen, corporate governance reforms, and Japan’s exit from deflation, contributed to improved corporate bottom lines. Within Asia, Taiwan outperformed with MSCI Taiwan gaining 7.7% (in USD terms) in March, driven by the AI rally.
Fixed Income: Government bonds posted modest gains in March. Yields on the 2- year US Treasury note stayed relatively flat but yields fell by 3.3bps and 5bps for the 5-year and 10-year US Treasury notes to 4.21% and 4.20% respectively. US corporate credit spreads narrowed in March given robust economic data. The Bloomberg Barclays Global Aggregate Index was up 0.6%. The US high yield market (proxied by ICE BofA U.S. High Yield Constrained Index) gained 1.2% while the Asian credit market (proxied by J.P. Morgan Asia Credit Index) returned 1.1%.
Macro overview
Growth: The US economy added a higher than expected 303,000 jobs in March with the unemployment rate falling to 3.8%. Meanwhile, Japan avoided a technical recession after it revised its annualized 4Q GDP growth up to 0.4%. China’s economy showed signs of improvement as its manufacturing PMI, an economic indicator on the conditions of its manufacturing sector, reached 50.8 in March, the highest in six months. Nevertheless, we expect global growth in 2024 to slow, with the risk of a US recession remaining over the next 6 to 12 months. While the multi asset team is positive on risk assets in the short term, the team expects US growth to slow more meaningfully over the longer term, which should drive equity valuations lower.
Inflation: US consumer prices rose by 3.5% in the year to March, up from 3.2% in February, driven higher by gasoline and shelter costs. Core inflation increased by 0.4% month on month. Given the stronger than expected inflation readings, the futures market is now expecting only one to two quarter-point rate cuts in the US for the remainder of the year. The team expects to see lower inflation in the US from mid to late 2024. US wages is one of the key drivers in determining the future path of inflation.
Monetary Policy: The Federal Reserve and the European Central Bank (ECB) left rates unchanged in March, but ECB President Lagarde hinted that the ECB could start cutting rates in June. Bucking the trend, Bank of Japan formally exited its negative interest rate policy and raised rates for the first time in 17 years. The Fed is trying to balance between keeping cutting rates and risk stoking inflation versus keeping rates high and causing economic growth to slow down excessively. At this stage, with growth remaining strong and inflation not falling rapidly, the Fed is unlikely to cut interest rates in the first half of the year.
Asset class views
Source: Multi Asset Portfolio Solutions team. Asset class views are as of the team’s most recent monthly meeting in April 2024 and should not be taken as a recommendation. 3m = 3-month view. 12m = 12-month view. The information provided here is subject to change at the discretion of the Investment Manager without prior notice.
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