Markets may have priced in a ‘soft landing’ but investors should follow safety guidelines and buckle up for a bumpy approach this year regardless, according to Salt Funds Management chief economist, Bevan Graham.
Graham said while Salt still rates an economic soft landing, especially in the US, as the base case for 2024, the ride in probably won’t be a smooth one.
“We think it will be a bumpy year,” he said. “The data will be bumpy and the path to 2 per cent inflation will be bumpy.”
Turbulence aside, Graham said most central banks will likely be able to cut rates this year, although the easing might be later and less aggressive than some investors have pencilled in.
As he lays out in the latest Salt ‘Global Outlook’, monetary authorities won’t pivot to rate cuts unless a “broad range of conditions are in place for a sustained return to target inflation”.
“We believe those conditions will be in place in most developed market (DM) economies at some point this year, most likely in the second half,” Graham says in the outlook. “That being the case, we recommend being wary of calls for early and aggressive interest rate cuts, particularly in the US, where we believe markets got a bit ahead of themselves in late 2023.”
He said the US and European central banks would probably cut first around June with the Reserve Bank of NZ set to follow, perhaps, five or six months later given lingering domestic inflationary forces.
“The bottom line is we believe the RBNZ has done enough tightening, but we don’t expect the first cut in interest rates to come until November this year,” the outlook says.
NZ was an early starter in the tightening cycle and might be one of the last to dismount if the central Salt scenario plays out as expected.
But structurally higher inflation driven by demographics and deglobalisation could stay the hand of central bankers, Graham said.
The US Federal Reserve may have little room to move amid soft landing conditions in the US of, say, GDP growth of 1.5 per cent, inflation settling at 2.5 per cent and 4 per cent unemployment.
“Investors should be asking how far the Fed will be able to cut if we get a soft landing,” he said. “Or if it can cut at all.”
Naturally, the path of interest rates and inflation remain the key risk factors in 2024 but the Salt outlook also says investor need to keep a close watch on other risks such as a fading Chinese economy and broader geopolitical volatility.
“Global markets are continuing to be confronted with a complex array of political and geopolitical risks that have the potential to shape economic landscapes and financial conditions,” the report says.
At a portfolio level, Salt favours global assets over local, defensive stocks, listed real assets with some capacity to add duration as well as select opportunities in credit.
“We are now traversing the expected global slowdown as the lagged impacts of tightening of policy around the world continues to impact the real economy, and asset markets adapt to protect existing capital gains by allocating funds toward ‘all-weather’ securities,” the report says.
“Such desirable investments, which we are actively seeking out across all our asset classes, are resilient to both inflation and to profit challenges in a less stimulus-based, capital spending and productivity-led phase of economic growth.”