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Banca March: resilience of the economy will postpone rate cuts

06 February 2024 Category: Banca March

  • Banca March anticipates a contained slowdown, with global GDP growth of 2.5% in 2024, the lowest since the pandemic. Rising financing costs will continue to dampen growth, but a less indebted private sector and strong employment will support consumption. 
  • Inflation, although lower, will fall short of central banks' targets. The expectations of rate cuts reflected in the curves are not in keeping with an economy that remains resilient. Banca March analysts expect only three rate cuts in 2024 (a total of 75 basis points from both the Fed and the ECB), far from the five cuts that the market is expecting. 
  • The bank remains optimistic on equities, but is cautious when it comes to adding risk, waiting for better times to increase exposure. At the regional level, the US stock market is favoured and, by sector, the search is for opportunities in technology, health and energy transition.
  • Official interest rates, at their highest levels in 20 years, suggest a good year ahead for fixed income, which in the second half of the year will benefit from the start of central bank cuts. The recommendation is to take advantage of the premiums offered by credit against sovereign bonds, in particular European high quality credit. 


Banca March's Market Strategy team believes that, despite the sharp increase in financing costs and a weakened industrial sector, 2024 starts with positive inertia and the current economic cycle has its own characteristics that make it more resilient than in the past: a less indebted private sector and strong employment will support private consumption, which will be the main engine for global growth. 

The bank believes that rate hikes are filtering through to the real economy via lower credit availability, which will weigh on private investment and, after years of strong fiscal stimulus, public spending will no longer be a driving force.  Against this, the outlook is more positive for private consumption, which alone will contribute more than 60% to GDP growth. 

This cycle is characterised by the good performance of employment, one of the key differentiating factors with respect to other periods of restrictive monetary policies, something that can be seen not only in the United States, but also in Europe, where GDP has stagnated but the unemployment rate is at an all time low. This resilience of employment and subdued inflation will allow a phase of household income recovery to begin in 2024 and, for the first time since 2021, real wages will be positive, which will support consumption.

Against this backdrop, global growth will continue its slowdown in 2024 and global GDP will grow by 2.5%, the smallest increase since the pandemic and one percentage point below the historical average. Significant regional divergences are anticipated. The Eurozone will remain sluggish, with growth below 1%, while the United States will gradually slow down and its GDP will add 1.5% in 2024, extending its strong post-pandemic recovery by one more year. As for China, although it has met the growth targets set, its recovery will also lose momentum and will grow by 4.4%, held back by the difficulties faced by its real estate sector.

Inflation down, but central banks' targets not reached

By the end of 2023, almost two thirds of the path towards inflation normalisation had been confirmed. However, in a context of wages growing at 4-5% and a strong demand for services, it will take longer for underlying inflation rates to break down. In this environment, inflation is likely to continue to moderate on both sides of the Atlantic, but at a slower pace than last year, so that 2024 could end with CPI growth of between 2.5% and 3% in both the United States and Europe, which would be close to, but short of, the central banks' targets.

One of the upside risks to inflation in 2024 will come from geopolitical tensions around the Suez Canal and its effect on supply chains. The main consequence of the conflict is the alteration in maritime routes and the increase in shipping costs. This is particularly true for Europe. If this sharp rise in transport costs from China continues in the coming months, we will see a rise in intermediate goods prices and, with that, inflation. And, if past episodes are anything to go by, this could add up to an additional 1 basis point to what is expected in the second half of the year.

The role of central banks: rates will not fall as much or fast as the market would like

If 2023 was the year in which the rate hikes came to a standstill, Banca March predicts that 2024 will be the year in which the cuts begin. Nevertheless, central banks will not rush to cut rates because inflation will not come down as fast as it has been, employment remains very strong and consumption will continue to be resilient.

Therefore, although this year will be marked by the beginning of the official interest rate cuts to be initiated by both the Fed and the ECB, the cuts will not occur as quickly or as intensely as the market was expecting: Banca March anticipates a 75 bp cut by both the Fed and the ECB, cuts that will only begin in the summer.

The bank expects rate cuts to be more contained than market expectations, as aggressive cuts in the past have coincided with sharp declines in activity and employment, which it does not expect to happen in the short term. Central banks will therefore try to align their monetary policy with the moderation of inflation, seeking to "balance" real rates and prevent monetary policy from being excessively restrictive. 

Financial assets: subdued optimism in equities and a preference for bonds

This situation leads us to look forward to the new year with restrained optimism, according to Banca March. Considering that, although there is still potential for the stock market, equity markets will not prolong the current "V" movement that started in October indefinitely, the bank recommends being demanding on equities, which will face a year of positive but modest returns more similar to those offered by other less risky assets.  

Looking ahead, it is advisable to maintain some caution in exposure, as the upside potential is limited by already stretched valuations but, above all, because global earnings expectations are already high: global growth is expected to be above 10%, which is at odds with a slowdown in growth. 

While it is true that equities tend to perform well after the pauses in official rate hikes, in the past these periods also tend to be transitional to the more volatile environments that usually begin after the first official rate cut. Therefore, it is appropriate to wait for better times to increase equity exposure. 

At regional level, Banca March's preference is for the US stock market, which will be the region that will continue to lead the improvement in earnings, driven by the greater contribution of technology. In addition, high ROE and lower leverage act as a tailwind for companies and support optimism. Moreover, it is important to note that election years have often acted as a support in the past: the average return of the S&P 500 in United States election years is 10%, having risen on 13 of the last 15 occasions.

In terms of sectors, a mix of technology - due to its high growth potential - and healthcare - a more defensive sector, but with attractive valuations - is favoured. Opportunities are also seen in sectors linked to the energy transition. On the flip side, the bank has reaped the benefits of last year's commitment to the European financial sector.

We forecast a good year for fixed income given that policy rates are the highest they have been in the past 20 years and that, when the Fed embarks on periods of rate pauses, real returns on sovereign bonds shall be positive. Adjusting for the estimated returns for the risk taken, it remains an asset that is recommended to be overweight.

In 2024, fixed income is expected to show its diversification capacity again and, with a more attractive IRR, will be a good port of call for more conservative profiles, as the risk of loss has been reduced. Given these reasons, Banca March expects fixed income to generate gains in all segments over the next 12 months, but its experts recommend taking special advantage of the additional premium offered by private credit over public credit and, in particular, high quality European corporate debt. 

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