Recession In 2024, Bonds Favoured – Carmignac

Amanda Cheesley Deputy Editor 5 December 2023

Recession In 2024, Bonds Favoured – Carmignac

Paris-based asset manager Carmignac has just released its 2024 outlook, which discusses the macro and market trends impacting investors and the firm's preferred investment strategy heading into 2024.

Although global growth has so far proved resilient, Raphaël Gallardo, chief economist at Carmignac, thinks that developed economies are heading for a recession in 2024.

Speaking at a media event last Friday, Gallardo said global growth has so far proved resilient to an historic rise in real rates. The resilience of the consumer in advanced economies is down to labour market tightness and terms of trade gains support real wages. Japan is the exception due to yen debasement, he added.

The wealth effects still support consumer spending, although down from their 2020 peak, he continued. The wealth effects are also still weighing on the savings' rate, but the lagged impact of higher interest rates and tighter lending conditions will push it back to 6 per cent by mid-2024 on their model, according to Gallardo. Excess cash has fallen to 2.6 per cent of GDP, from the second quarter of 2023, but it is exhausted for the 60 per cent of poorest households. The sharp acceleration of immigration has played a role too in reducing labour tensions in services, enabling disinflation.

Gallardo highlighted how corporates are in good financial shape, but he believes that they will be the driver of recession in 2024. Corporates should respond to falling margins by cutting spending. However, capex is already weak, and layoffs are limited by skill shortages and expectations of a mere soft patch, resulting in the slow-motion entry into recession.

Carmignac believes that private consumption will be supported in the first half of 2024 by rising real wages, residual wealth effects and excess cash. But a higher interest rate burden and tight lending conditions should start pushing up the savings rate from early 2024.

The financial system has proved resilient so far because leverage in this cycle has been mostly born by the government and more modestly the private debt market. This brings more resilience in the short-term, but at the cost of less policy flexibility when the recession hits, Gallardo added.

Gallardo believes that developed economies should stay on a “slow landing” trajectory in the first half of 2024, followed by a recession in the second half, led by the US. China should escape a recession. The main concern in China is the housing crisis keeping foreign and domestic private confidence at depressed levels. He thinks that the latest stimulus package and the geopolitical détente with the US should suffice to stabilise growth at around 4 per cent, but only temporarily. “The Chinese are not doing enough and they will have to do a lot more to get to a 5 per cent growth rate,” Gallardo continued  

Portfolio allocation
As recession starts to bite in 2024, Kevin Thozet, a member of the Investment Committee, favours five-year high yielding bonds. Other wealth managers also favour bonds in 2024. HSBC Global Private Banking, UBS Global Wealth Management see value in quality bonds. See more here and here.

For equities, Thozet prefers defensives, notably consumer staples, healthcare and utilities. He also sees a strong recovery in Chinese equities and a renewed interest in Japanese equities in 2024. He is not alone in his views. German asset manager DWS and Orbis Investments also believe that the Japanese market is attractive in 2024, citing factors such as the rebound in tourism in Japan. See more here

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