2023-11-29 16:39:22
The global economy will slow down in the coming months, but without falling into recession, according to experts from the leading Belgian bank. In the longer term, they advise betting on bonds.
The economic scenario “Boucles d’Or” is the one favored by BNP Paribas Fortis experts for the coming months, at least for the United States and to a lesser extent, also in Europe. In practice, this results in a situation of equilibriummarked by a “soft” landing and a slowdown in the economy, but without recession, with a return to calm in terms of inflation.
As explained Koen De Leus, chief economist of the country’s largest bank, “American consumers have so far emptied their piggy banks, but we are reaching the end of this story.” If so far, American GDP has experienced strong growth (5.2% at an annual rate in the last quarter, according to figures published this Wednesday), it seems inevitable that things will balance out under the effect of rising rates of interest.
“American consumers have so far emptied their piggy banks, but we are reaching the end of this story.”
For the euro zone, he predicts stagnation, in particular because businesses there are very sensitive to rising rates. Three quarters of their financing comes from banks, which reduces their borrowing capacity when the cost of debt increases. As for inflation, it would fall, in Europe as in the United States, to 2.5% within a year.
“It’s the rates that drive the market”
How will these developments be received by central banks? BNP Paribas forecasts expect a reduction in key rates from 5.5% currently to 4.25% by the end of 2024 for the Federal Reserve (Fed), and from 4% to 3.25% for the deposit rate. of the European Central Bank (ECB). That is to say five and three rate cuts respectively in the space of one year.
“If corporate results and the economic cycle show a slowdown, it ultimately wouldn’t be a big deal, since rates are what drives the market.”
This point is crucial, because, for Philippe Gijsels, the chief strategist of BNP Paribas Fortis, it is the rate cycle which continues to dictate its law on the stock market. “If corporate results and the economic cycle show a slowdown, it would ultimately not be very serious, since it is the rates that drive the market“. A phenomenon which has been confirmed in recent weeks on Wall Street, where the 70 basis point decline in the yield on 10-year US Treasury bonds was accompanied by a 10% jump in the S&P index. 500.
Over the summer, however, things seemed to take a different turn. According to experts, there should be a warning, these pointing the finger at the extreme budget deficit of the American government (around 7% currently), even higher than that of Belgium, which is becoming problematic with current rate levels. Especially since three of the four main categories of Treasury bond buyers are now gonenamely the Fed (due to quantitative tightening), Foreign states (usually for geopolitical reasons, like China and Russia) and commercial banks (which are now less saturated with liquidity).
Lock in current rates by betting on bonds
This leaves only institutional investors (pension funds, insurers, etc.) and individuals, but these two groups will not be enough to restore the situation of the past. “Rates will not return to 0 or 1% in the next twenty years. We are in a world that is structurally different from the one we have known for four decades“, estimates the strategist. With the key, new cycles of inflation, and therefore increases in key rates in the coming years.
If in the short and medium term, rates were to fall, they might therefore rise sharply in the more distant future. “It wouldn’t surprise me to see rates at 7 or 8% in a few years if the economy suffers new shocks“, argues Philippe Gijsels, who cites the inflationary risks posed by the growing importance of rare metals (cobalt, nickel, copper), whose prices might soar depending on geopolitical factors and the explosion in demand.
To protect yourself in the medium term, this stock fan therefore recommends locking in current rates by buying good quality bonds, which offer yields of 3 to 4% in the euro zone, and even more for dollar securities. On the other hand, he advises once morest betting on “junk bonds”, with attractive rates, which are much riskier if the economy slows down more than expected. “Don’t be fooled by a 50 basis point difference.”
“There are extremely undervalued market segments”
Although bonds currently offer higher returns, “Stocks continue to be a strong hedge once morest inflation“, further recalls the strategist, who advises once morest sitting on one’s liquidity. Since the start of the year, he has noted that flows have been directed towards debt securities, but also and above all towards the big names of the Big American tech, the aptly named “Magnificent Seven”. “In thirty years in the business, I have never seen a market so concentrated on a few stocks.”
Should we therefore also position ourselves on these stocks (or their European equivalents), to which we owe most of the rise in stock market indices in 2023? In any case, they seem inevitable in a portfolio at the moment, for Philippe Gijsels, but this situation where the winners of a new trend (AI) are identical to those of the previous one (the rise of digital technology) is unprecedented, and calls for caution.
“In thirty years in the business, I have never seen a market so concentrated on a few stocks.”
“There are other segments of the market that are extremely undervalued and cheap“, points out the strategist. For the stock market performance of the coming year, he sees two possibilities. Either the rally will extend to these other segments of the market, or there will be a general correction. “But to this question, I do not have the answer.”
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