Macro Update – April 2024

Macro Update April 2024

The global economy demonstrates resilience, the probability of an imminent recession is very low and inflation seems poised to moderate in the coming months. If we put all these factors together, and considering also that both the Federal Reserve and the ECB seem willing to start cutting interest rate in the not-so-distant future, it is difficult not to be optimistic regarding financial markets in the short term At the same time, and despite these favorable trends, vigilance remains essential. There’s concern that central banks might be underestimating inflation risks, which could lead to unanticipated price increases later in the year. Additionally, the high levels of public debt and deficits in many countries pose a medium-term risk for financial instability. In light of these considerations, our investment strategy involves three key positions: firstly, to continue participating in market gains for the time being; secondly, to be wary of inflation risks, advising against duration exposure, especially in the long end of the yield curves; and thirdly, to minimize investments in government bonds of highly indebted countries, while favoring credit positions and currencies from countries with strong economic fundamentals regarding price stability and fiscal health.

Based on the information available so far regarding the first quarter of the year, the United States would be growing at rates slightly above its long-term potential. At the same time the inflation expectations of American consumers and businesses remain reasonably well anchored:

The improved balance between supply and demand, along with inflation expectations near the Federal Reserve’s target, supports the prospect of a soft landing and gradual disinflation for the U.S. economy. Additionally, the expected slowdown in shelter costs within the Consumer Price Index (CPI) in the coming months will further aid in the gradual moderation of prices. At the same time, macroeconomic activity in the Eurozone continues to show signs of some recovery:

The global economy is likely to grow steadily with gradually declining inflation. However, there’s a concern that central banks may not fully recognize that neutral interest rates have risen notably since the period before the pandemic, due to factors like increased consumer ”impatience”, better financial health of consumers, limited supply excesses, heightened fiscal activity, the need for  strong investments related to energy transition and defense, the impacts of deglobalization, and demographic shifts. In turn if neutral rates were indeed higher today than before the pandemic that could mean monetary policies are less restrictive than needed to manage inflation effectively. With real interest rates potentially less constraining than they seem, and with financial conditions remaining loose due to low credit spreads and high stock markets, there’s a risk financial conditions might not be tight enough to curb inflationary pressures.

In the medium term, global economic instability is more threatened by public than private finances, with high public debt and deficits widespread. Apart from the numbers, another major concern is the global political class’s reluctance to undertake substantial fiscal reforms due to the potential electoral backlash.

The rest of our core macro outlook stays the same: Emerging Asia’s growth continues to be strong, with China’s data surpassing expectations, supporting a 5% growth forecast this year; Japan is steadily normalizing monetary policy and it is likely that in the coming months the BOJ will start reducing public debt purchases, which could increase government bond yields significantly this year.

Equity:

We have a positive outlook and recommend a balanced mix of value and growth equities, with a preference for cyclicalsstocks. European equities are favored over American due to expected macro improvement in the Eurozone  and better valuations, though U.S. small-caps are also attractive for their relative valuation compared to other parts of the US markets and the potential of SMEs to do well in a stable macro environment as the one we are expecting. Equity exposure in emerging Asia, including China, is advised for its improved growth signs and valuation appeal.

Government Bonds:

While we consider long rates in the U.S. to be near fair value, we remain cautious about duration risk. This caution stems from anticipated neutral rate upward revisions and potential increases in the term premium due to fiscal challenges and more more symmetric inflation risks post-pandemic. For the German curve, we see upward risks in medium and long rates due to probably too low real rates. Additionally, potential fiscal difficulties in some Eurozone countries might cause spread widening. In Japan, we predict a notable rise in the 10-year bond yield within 3-6 months, likely following a probable BOJ decision to slow debt purchases.

Corporate Bonds:

We favor corporate fixed income as default rates are expected to remain stable. However, with tight spreads, we recommend pairing credit exposure with selective investments in emerging market sovereign debt in local currency for two reasons: it offers attractive returns, both from carry and potential currency appreciation against the euro, and involves countries with strong growth prospects, sound economic governance, low public deficits, and controlled inflation, making this debt less risky than in the past.

Currencies:

Given the ECB’s dovish stance, we anticipate a weaker euro in the coming months, favoring long positions in currencies with strong carry, controlled inflation, and solid fiscal health. We remain positive on the NOK, NZD, and AUD among developed markets, owing to their high ratings, favorable carry against the euro, and better macroeconomic outlook compared to Europe. In the emerging markets, we favor currencies like the BRL, INR, MXN, and IDR, which exhibit good macro governance, high carry, and strong growth prospects. For the dollar, especially at a 1.07 level or lower, we suggest only moderate long positions, considering valuation concerns, the U.S. fiscal situation, and an expected narrowing growth differential with Europe through 2024.

This report has been prepared by AMCHOR Investment Strategies SGIIC, S.A. (“AMCHOR IS”) an entity participated by the Alantra Group and incorporated as an investment firm authorized and supervised by the CNMV, registration number 273 with registered office at Calle Velázquez Nº 166, 28002 Madrid (Spain). 

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The investor should note that the financial market is fluctuating and as such is subject to variations. The price of investments (which may be quoted in illiquid markets) may change and the investor may not get back the amount initially invested. The figures contained herein relate to the past. Past performance is not a reliable indicator of future results.