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Asset allocation: expectations and forecasts

Better but not by much

We expect to remain below consensus forecasts, albeit with a smaller gap than anticipated.

The bearish outlook for 2024 (formed in October - November 2023) was revised upwards at the start of the year.

In the US we currently have an earnings growth forecast of between 10-12%. If we adopt a more conservative approach, we can position ourselves for earnings growth of 7-8%.

Balancing the odds

The market rally in November and December demonstrated that the risk of recession in the United States is still underestimated by investors.

We now believe that, in 2024, the global economy faces an asymmetric crisis.

Our recession indicators continue to flash red and the overall environment is certainly not conducive to strong growth, even if a recession is avoided.

Low unemployment, rigid labor markets, slowing nominal GDP growth, a weak real estate market and stringent bank lending conditions are all indicators pointing to the final phase of the economic cycle.

Very high equity multiples and numerous rate cuts already priced in have led to the market being much more expensive at the end of 2023: also limiting the potential for a further rally.

Problems to solve

Various geopolitical risks and a busy electoral calendar create volatility and uncertainty.

The most important political event of 2024 is the American elections.

Polls suggest that a Trump victory in the next election is a strong possibility, although not inevitable.

A Trump victory could lead to trade disputes, tax cuts and further US isolationism. All of these are, in principle, inflationary stocks that could lead to higher yields.

Tax cuts can be positive for stock markets, but it depends on where we are in the economic cycle at the end of 2024.  If inflation is low and growth is below trend, tax cuts should lead to a rally in the sector equity.

If inflation is above target, we could see a rate hike and a much more aggressive Fed leading markets into a significant contraction.

Outside the United States, the geopolitical risk scenarios are notable: from an escalation of the war in Ukraine and continued NATO involvement to the intensification of clashes in the Middle East to an escalation of relations between China and Taiwan.

We believe that embracing uncertainty is the key to success in this complex context: defensive asset allocation without the presumption of anticipating the market.

Market brief is part of OTB NEWS

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