Risk for recession remains despite the sustained market
While the Fed’s pivot in December has sustained the market in the fourth quarter, the risk for recession remains, according to data from FTSE Russel’s Asset Allocation Insights report.
The latest release of the quarterly report showed that inflation has fallen enough for central banks to point out a pause as rate cuts are to be expected in the upcoming year. While growth is slowing down sharply, it can be supported in the medium term by increased investments from the fiscal policies of the US as well as reshoring and productive growth led by AI. Straying from the year-to-date trend, capital flows in November also showed a change as money flowed back to equities, US and credit.
As inflation is falling in North America and Europe, Japan reached its target levels of inflation while China continues its attempt to fend off deflation. Due to a mixed inflation and resulting rates picture, higher dispersion is seen in global equities.
US IG corporates have been trading at tight spreads as US Treasuries offered close to pre-GFC yields. Notably, European bonds have seen the best performance in IG and HY in the last three months, year-to-date, and 12 months while still having a more attractive valuation, yield/duration as well as better credit mix.
In the 18-24 months after the start of hikes in rates as well as the 12-18 months post yield curve inversions, trends have shown that the US and the global economy may be entering the slowest growth period. Risks also include sharply lower US GDP estimates in the fourth quarter which slowed down the forecasts of earnings growth, negative revisions, and valuation re-ratings that may have moved ahead of equity fundamentals in the US.
Meanwhile, alternate asset classes continue to be attractive as listed real estate performance has turned healthy in hard-hit Europe and UK. The sector breadth has also improved globally which showed that the real estate may have bottomed. Listed real estate and infrastructure were also providing healthy income yields, reaching around 4% as commodities performance in line with equities seem to be on an uptrend.
With the differing return-risk of asset classes and correlations indicating that the markets are constantly changing, diversification continues to be important.
