With investment markets looking past peak inflation and interest rates, there were some meaningful changes during the fourth quarter. Participants adopted the ‘soft-landing’ narrative for the US economy as a central scenario, having previously been concerned that it was an unlikely outcome. In Japan there continues to be some positive developments around the end of deflation, a reinvigorated/reforming corporate sector and the Bank of Japan remaining quite accommodative. In Europe there are concerns about structural issues in Germany, whose largest customer China has been reasonably weak. However peripheral European economies have been performing quite well. The weakness in the Chinese economy and their real estate sector has weighed on the Chinese stock market.
KEY POINTS
• Inflation coming down in the US and Europe has provided a runway for the Federal Reserve and the ECB to step back from what is now judged to be an overly cautious monetary stance. Market expectations around future easing of policy led to a strong finish to the year for investment markets.
• We remain excited about the opportunities in the period ahead and see the potential positive disinflation/monetary dynamic as supportive for markets.
• Equity markets should start to broaden out in performance as earnings recover and the ‘soft landing’ narrative is adopted by investors. This should help asset classes with attractive relative valuations, such as mid cap global equities, Japanese equities and European equities.
• Now is the time to focus on harvesting yield in the portfolios as a modest default cycle coupled with declining interest rates should support returns.