As we firmly walk into 2024, all global outlooks for the financial industry have now been published, deliberated on, and rigorously debated. This New Year also coincides with the start of a new lunar year, marking the beginning of the year of the Wood Dragon, an auspice of growth and transformation that appears only once every 60 years. It will also mark the beginning of a new cycle in Feng Shui, the 9th cycle, which will last until 2044. In a recent client event in Hong Kong, a Feng Shui master shared his own outlook: 2024 would be a year full of energy and changes with the following recommendations: i) keep an open and crystal clear mind to weather any unexpected changes; ii) stay calm and focused without losing sight of what is of utmost importance; iii) stay vigilant to get rid of unwanted “items”.
Take time to reflect on these wise words. They resonate well with what lies ahead of us in the financial markets. We now look towards a year of full energy as growth stabilises and the US moves on from the recession fears that plagued in 2023. A year of changes as central banks start to normalise monetary policy in developed economies, another sharp contrast to last year.
USD 8 TRILLION SITS IN MONEY MARKET FUNDS
2023 was a record year in terms of inflows into money market funds in the US, with USD 1.3 trillion of new money being parked into short-term cash solutions. In Europe, it was a record year for fixed income funds, as investors took advantage of attractive yields they had not seen in a decade. But the pivotal question for the coming year will be where this newfound liquidity will end up.
The value proposition of 5% in US dollars seemed compelling for 2023, but after a +25% rally in the MSCI World last year, many investors may be looking back wishing they had put more cash to work. An open mind can serve us well at this pivot point: once central banks start to unwind their restrictive policy, the key question will be to see how this liquidity (USD 8 trillion!) might move into riskier assets again.
With only USD 170 billion of inflows in equities last year, the reallocation away from money markets could provide a significant floor to any drawdown in equities.
THE FED AND THE ECB TO BE SYNCHRONISED IN EASING RATES
We do recognise that sentiment has improved significantly, as shown by various metrics like the Bull & Bear ratio, which illustrate that investors positioning (especially speculative positioning) seems to be stretched. But institutional investors have barely moved: as the economic outlook improves and central banks ease, they might return gradually to the market. On central banks expectations, we are revising our projections and now expect both the US Federal Reserve (Fed) and the European Central Bank (ECB) to cut rates by 100 bps in a synchronised fashion starting from Q2. The main rationale being the fall of inflation in both regions but also a weakening economy in Europe. Market expectations, six cuts for a total of 150 bps as early as Q1 for both central banks, appear too aggressive for now.
As written above, equity inflows have been rather timid last year. In Europe, companies buying back their own shares has made up the bulk of equities purchases. International investors have left Europe already after a good run in the first half. In the US, both corporates and retail have been buying equities. This is likely to continue, and if liquidity shifts away even partially from money market funds and institutional investors gradually reallocate to equities, there will be competition to buy any market dip. So stay calm and focused, without getting side tracked on the markets.
In this edition of our monthly house view, Nicolas Mougeot is taking a deep dive into the theme of electric vehicles. His analysis goes beyond the debate of the environmental question and looks at the profound implications from a geopolitical, technological, economic and social point of views.
Monthly House View, 18/01/2024 - Excerpt of the Editorial
January 31, 2024