Investors are moving on from the recession that 'never was'

Resilient world economy: Investors are revising strategies for 2024, deviating from conventional plays based on the anticipated recession and interest rate cuts. Despite the world economy proving resilient, there's a shift away from government bonds and big tech shares.

Instead, investors are seeking bargains in sectors historically impacted by recession fears. The recent bond rally has slowed due to robust data, challenging expectations for swift monetary easing. Some money managers believe sustained economic growth will support small-cap shares, banks, and cyclicals, potentially drawing cautious money back into equities.

Renewed economic growth

Evan Brown, head of multi-asset strategy at UBS Asset Management, sees the surprise this year in renewed economic growth. Favouring mid-sized stocks and European banks, he leans towards stocks over bonds. While global economic performance faces a challenging outlook, strong employment and improving consumer sentiment in Europe mitigate some concerns. US and Eurozone growth projections remain positive.

As money markets predict around 140 basis points of US rate cuts this year, there's a shift in expectations. Investors anticipate a soft economic landing rather than a recession, with the Federal Reserve likely to be more conservative in its rate cuts. Benchmark yields, such as the 10-year US Treasury and Germany's 10-year Bund, have experienced fluctuations, impacting investor decisions. Pictet Wealth Management's CIO, Cesar Perez Ruiz, suggests low-valued businesses globally could become takeover targets, possibly in the UK's mid-cap FTSE 250 index.

Challenges for Bond market

However, the bond market faces challenges, with 10-year US Treasury yields around 4 per cent, down from 5 per cent in October. Euro area inflation rebounded to 2.9 per cent in December, and some analysts argue that US inflation remains too high for significant monetary easing. The debate for stocks revolves around their survival in a no-recession scenario that may reverse rate-cut expectations.

UBS's Brown anticipates better performance from US mid-sized stocks in cyclical industries this year. European and US banks are expected to benefit from resilient growth, healthy earnings, and elevated interest rates. Global equity investors, according to Citi's measure, have entered a stock-pickers' market for the first time since 2019. Federated Hermes chief equity strategist Philip Orlando favours value stocks over tech, citing attractive low PE multiples and high dividend yields. The evolving economic landscape prompts investors to reassess traditional market narratives for potential opportunities in 2024.

(with Reuters inputs)