Inflation has declined substantially and central banks are done tightening monetary policy. Moreover, a recession has been avoided and a soft landing is therefore within sight. But financial markets have already priced in the good news – so what comes next?
That is the big question right now and exactly what Head of Macro & TAA, Bo Bejstrup Christensen, focuses on in our latest AM Quarterly View report.
We still stress that global equities risk becoming markedly more expensive if our short-term expectations for the global economy pan out. In fact, equity markets could potentially become historically expensive. Bo Bejstrup Christensen, Head of Macro & TAA at Danske Bank Asset Management.
MACROECONOMY: Potential for increasing growth
Naturally, the soft landing is not guaranteed yet. Several things could go wrong in 2024, including political chaos driven by the upcoming US presidential election, or inflation could experience a resurgence due to a commodity price shock, for example.
However, should the US manage to slip through 2024 without a recession, which is our base scenario, we see an increasing probability that the current expansion in the US will continue well into the latter half of this decade. In the eurozone, we expect increasing but still low growth going forward to 2025. While in China, growth has stabilised and we expect a modest acceleration driven by slightly higher activity levels in the housing market and higher global growth.
EQUITIES: Equity boom in full swing – but is it sustainable?
At the start of Q4 2023, we assessed long bond yields to be the key to higher equity prices. We expected a modest decline in yields and returns of 5-10% on global equities over the coming 12 months. We called the direction correctly, but the pace was much faster than we expected. Global equities rose by just shy of 10% during the quarter and long yields fell markedly.
Therefore, the question now is whether long yields are at fair values – and how expensive equities have become?
Given the recent strong increases in both Q4 of 2023 and 2023 as a whole, we now estimate global equity valuations to be very expensive, led by US stocks.
However, if long yields can fall further against a background of decent global growth, easing inflation and the start of looser monetary policy, we estimate equity prices should rise further. Furthermore, we still stress that global equities risk becoming markedly more expensive if our short-term expectations for the global economy pan out. In fact, equity markets could potentially become historically expensive.
BONDS: We expect further yield declines
Bond yields fell sharply towards the end of the year and are again approaching levels we consider fair. Financial markets are now pricing in more easing of monetary policy in the US and the eurozone than we expect, taking short bond yields to levels we view as perhaps a tad too low relative to ultra-short money market rates, which we estimate will remain elevated for some time to come.
Medium-term bond yields in both the eurozone and the US are trading roughly fair or slightly below. Only at the very long end of the curve in the US do we regard yields to still be a little too high. In other words, we continue to see the best risk-adjusted return in very long US duration risk.
Common to both German and US yields is that we expect further declines going forward to 2025 driven by lower inflation and monetary policy easing.
READ MORE in our new AM Quarterly View here.
This material has been prepared for information purposes only and does not constitute investment advice. Note that historical return and forecasts on future developments are not a reliable indicator of future return, which may be negative. Always consult with professional advisors on legal, tax, financial and other matters that may be relevant to assessing the suitability and appropriateness of an investment.
