Chronicle of a recession foretold 

Once again this year, the financial markets reveal a shifting horizon, strewn with challenges and offering investors a captivating odyssey.  

Geopolitical tensions and economic uncertainties continue to exert considerable influence on world markets. Added to these immediate concerns are the no less critical issues of global warming and biodiversity loss, which remain pressing challenges for 2024 and future generations. These issues, which are more interconnected than we can measure, demand concerted attention and action from investors, businesses and governments alike. 

In these volatile conditions, a thorough understanding of the underlying factors shaping the global economy is - more than ever - an essential prerequisite for identifying compelling investment opportunities. What's more, in an election year fraught with pitfalls, where populist temptation will unfortunately be the chant in the background, we believe that integrating extra-financial considerations into our investment decisions remains the best way to create value for our investors, while promoting the transition to a more sustainable future. It's a necessity in an increasingly uncertain world, and it is our commitment to our customers. 


Year on year: the global economy in resistance mode 

2023 will have contradicted many Cassandras and financial laws that were thought to be immutable. Indeed, despite monetary tightening of unprecedented speed and magnitude, an inverted yield curve and a banking crisis, the most telegraphed recession in history... didn't happen. However, the last twelve months have been particularly tumultuous and testing for convulsive markets, buffeted by geopolitical conflicts, economic uncertainties and central bank moves more closely watched than those of Taylor Swift.  

In fact, bond market volatility has made a comeback. And as is often the case, the surprise came where it was least expected. While we were anticipating positive growth and a slowdown in inflation, honesty compels us to admit that the strength of the US economy took us by surprise -- household purchasing power turned out to be much stronger than anticipated, supported by wage increases and a comfortable savings cushion, swollen since the Covid crisis. 

A year on, with the cycle further advanced and financial conditions tighter, the spectre of recession is knocking at the door, and it seems more necessary than ever to think about investment prospects in terms of the new bond paradigm. As we build up our allocations, we are addressing this challenge and its consequences through a series of ten questions to which our experts will be contributing their answers and convictions, throughout the month of December. Here's an overview. 


A new bond paradigm  

"High for longer?” While central banks have so far managed to keep inflation in check, it's the question, the one that many of us - myself included - put on paper before anything else. Will they be less restrictive in 2024? With bond yields once again at attractive levels, is this the right time to increase duration and continue to favour the credit market, whose resilience has surprised many? 

Similarly, rising interest rates have had an impact on the dynamics of public debt. But in an environment of weakening growth and reduced purchasing programs by central banks, could the question of debt sustainability arise again in 2024? Nor has it been without effect on real estate markets, with a fall in construction and sales. While price declines have so far seemed limited, should we be concerned about an acceleration or, on the contrary, a tremendous opportunity for repositioning? 


At the equities theater: several times, several places... several actions 

Despite high real interest rates, equity indices held up well. However, this is a trompe-l'œil rise, marked by strong selectivity in favor of US mega-caps and a discounting of small and mid-caps. So which sectors and geographical areas should we focus on in the future? 

After being penalized by rising interest rates in 2023, will defensive growth stocks regain some of their superb form to outperform in 2024? Will these companies, particularly in the healthcare sector, which are at a discount despite a solid balance sheet and low debt levels, once again benefit from demographic change and their strong capacity for innovation?  

And what about the renewable energy sector, battered by rising interest rates, soaring raw material costs and flagging profitability? The consequences of global warming are unequivocal, reminding us that the energy transition is necessary even if it faces short-term challenges. Investments are still insufficient to meet carbon neutrality targets. Today and tomorrow, this theme will be unavoidable, but what role should it play, and what tactics should it adopt? 

Finally, what about China's growth model? Has the country reached the end of its rope, and is it on the verge of the ‘Japaneseization’ of its economy? Do other emerging economies offer the growth and innovation potential to compete with the Middle Kingdom? What are the alternatives?  


2024, a year of elections and challenges 

In addition to the European elections, where many issues will be at stake - not least the crucial one of energy transition - all eyes will be on the United States this autumn. Despite an air of déjà vu, how could this election impact our scenario?  

Ultimately, faced with an unstable geopolitical environment and a fragile economy where the immediacy of data is paramount, investors will continue to listen to the political and economic players, and will continue to interpret their signals to build their portfolios: should we still favour bonds over equities?  

One thing is certain: a persistently tight labor market would support a scenario of higher inflation, and therefore potential further monetary tightening. The return of a Trump 1.2 to the Oval Office would rekindle tensions with Beijing. Finally, an escalation in the Middle East or beyond Ukraine's borders would reshuffle the deck in terms of economic scenarios. 

Fortunately, there is still plenty of good (and not-so-good) news to come: an inflexion on the part of the major monetary powers would mark the long-awaited "pivot" and support the riskiest asset classes. A massive support plan in China would also be very welcome, especially in Europe. Finally - and even if it seems like wishful thinking at the time of writing - the end of the Russian-Ukrainian conflict would considerably reduce the geopolitical risk in Europe. 

On this positive note, the entire Candriam investment team and I wish you all the best for a prosperous 2024. Together, we remain fully committed to working with you to navigate the challenges and opportunities that lie ahead.  

Enjoy your reading! 

  • Nicolas Forest
    Nicolas Forest
    Chief Investment Officer