Winter is approaching...

"Will the central banks of developed countries succeed in their bid to bring inflation back to their 2% target by the end of 2024... without triggering a recession? Can China still avoid deflation? After a few months of calm, aren't rising oil and agricultural prices likely to further complicate the task of central banks?"


Economic outlook: weak growth 

Global growth continues... at a slow pace: the expected increase in GDP of 3% in both 2023 and 2024[1] is well below the 3.7% average observed over the years 2004-2019[2]. This gap is largely due to a slowdown in emerging economies, particularly China.


Deflationary forces in China will be hard to counter

Problems in the real-estate sector and weak household demand have prompted Beijing to take tentative measures such as reducing down-payment requirements for home purchases, speeding up refinancing for existing mortgages and increasing tax deductions. These measures may not be enough to boost activity.


Is the United States on track to succeed?

The Federal Reserve seems to have found the right mix to control inflation without triggering a recession. As a result, economic growth remains solid, with inflation down from 8.5%[3] to just over 3% in July 2023. However, the Federal Reserve is likely to maintain its monetary tightening[4] until the end of the year.


Euro zone: slow growth

In the eurozone, growth remains weak and economic surveys suggest a contraction in activity in the third quarter. Business investment is expected to slow, while rising mortgage rates and tighter credit conditions continue to put pressure on new housing construction. Household consumption should pick up a little early next year if inflation continues to ease, however, although consumer confidence remains weak and job creations are likely to be moderate.


Financial markets: a pleasant surprise in the United States and disappointments in China and Europe

From a market perspective, the gap between positive economic surprises in the US and disappointments in China and Europe had a direct impact on asset class performances. US equities have returned +17.6% since the start of the year, while European equities have gained only 9.2% and emerging equities +4.1%[5].

The US benefited from a favourable environment, with stronger-than-expected economic growth and steadily decelerating inflation, which naturally supported US equities.



Markets and asymmetric equity risk

Market sentiment has improved significantly since the start of the year. Investors were initially cautious, but the excesses of pessimism have normalised, particularly in the United States. The market is currently in the “neutral” zone as far as equities are concerned, but the risks now seem more asymmetrical on the downside, justifying our cautious approach.

US equities could continue to benefit from the current favourable environment, although we nevertheless expect economic growth to slow in 2024, with lower inflation likely to weigh on corporate earnings growth.

In Europe, the situation is quite different. Equity valuations are more attractive, but an improvement in the economic outlook is needed in 2024 to increase our allocation to European equities. Emerging markets, with the exception of China, offer better growth momentum, supported by monetary easing.


Investment style and opportunities

In terms of style, we favour defensive sectors[6], particularly in Europe, which is performing better in this phase of economic slowdown. We are also overweighting long-term themes such as energy transition and automation. Stocks corresponding to these themes should be less impacted by economic cycles and benefit from structural geopolitical issues around the reduction of our environmental impact, the development of artificial intelligence and the need to repatriate certain activities that contribute to national sovereignty.

Despite activity indicators showing a slowdown in the economy, particularly in the manufacturing sector, cyclical stocks[7] outperformed defensive stocks, anticipating a reacceleration in activity, which is not our central scenario.

At the same time, it seems to us that defensive and quality stocks are better able to cope with a slowdown cycle associated with persistent inflation. In such a scenario, their price-determining power will be paramount.


An allocation to bonds that provide yield and protection

We consider government bonds from developed countries to be attractive, with a gradual increase in the portfolio’s duration[8], given the diversification and protection provided by this asset class. We are nearing the end of the monetary tightening cycle, but central banks are still talking very cautiously.

Short-term rates are likely to remain at fairly high levels until central banks are certain that the deceleration in inflation is sustainable. Long-term interest rates should stabilise, with inflation under control and growth slowing.

At this stage of the cycle, we also favour investment-grade corporate bonds, which remain attractive despite spread compression[9] in 2023. High-yield credit is more cautious.

With weak but positive growth avoiding recession on both sides of the Atlantic and underlying inflation easing only gradually, central banks will not be able to afford to ease financial conditions between now and the end of the year.

Financial markets are already incorporating a positive scenario for a soft economic landing, justifying the good performances seen since the start of the year. With the positive surprises now largely priced in, there seems little room for further appreciation in equity markets, justifying a degree of caution on risky assets.

We prefer to position ourselves in the carry assets most likely to benefit from the current cycle, such as developed-country government bonds and high-quality European corporate credit. We are cautious on equities, preferring emerging equities to European equities.


Past performance, simulations of past performance and forecasts of future performance of a financial instrument, financial index, investment strategy or service are not reliable indicators of future performance. Gross performances may be impacted by commissions, fees and other charges. Performance expressed in a currency other than that of the investor's country of residence is subject to exchange rate fluctuations, which may have a positive or negative impact on results. If this document refers to a particular tax treatment, such information depends on the individual situation of each investor and may be subject to change.


[1] Source: IMF
[2] Source: Candriam
[3] July 2022
[4] Higher interest rates and reduced liquidity constitute a restrictive policy, or monetary tightening (in the event of high inflation or an overheated economy).
[5] Data in euros at 12 September 2023 - source: Bloomberg
[6] Defensive sectors are less sensitive to economic trends and therefore more resilient in the event of a downturn in macroeconomic indicators.
[7] Cyclical stocks, whose performance correlates with the economic cycles of their sectors.
[8] The duration of a bond is the average life of its cash flows, weighted by their present value. The higher the duration, the greater the risk.
[9] Difference between the yield on investment grade bonds and that on a non-risky bond

  • Nadège Dufossé, CFA
    Nadège Dufossé, CFA
    Global Head of Multi-Asset, Member of the Executive Committee
  • Florence Pisani, PhD
    Florence Pisani, PhD
    Global Head of Economic Research