Monday Dec 04, 2023

Equity Strategy: December Chartbook: long duration stays the key call; Real GDP growth projections at stall speed for much of 2024 do not leave any room for error

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

We look at 3 key drivers for next year: first, falling bond yields. We called in October to position for a long duration trade, on the back of likely finished Fed, continued deceleration in inflation, activity softening, and post a big bond selloff. As the move lower in bond yields gains traction, it is initially seen as a positive for equities, but that supportive effect might not hold for too long. Second, sequential activity slowdown vs this year. Our economists are projecting 2024 real GDP growth in almost all key regions at a slower run rate than what transpired this year. Importantly, for 3 quarters in a row next year US real GDP growth is forecast to be between 0-1%. This stall speed is not leaving any margin for error, and it is consistent with underwhelming earnings delivery. While recession is not our base case, it doesn’t take much to tip the activity into contraction at such a low starting point. Crucially, unlike a year ago, when almost all economists and the market pricing had recession as a base case, both are in a soft landing camp now - perhaps one should be contrarian yet again. Third, while consensus is looking for earnings pickup in 2024, weaker pricing might lead to disappointments. At sector level, we look for bond proxies such as Real Estate and Utilities to outperform, and have recently cut European Banks to UW. We also find consumer and corporate cyclicals stretched, post a strong run, and have cut a number to UW. Regionally, we continue to find Japan as attractive. Lastly, despite typically favourable seasonals in December/January, current technicals look far from attractive, with SPX RSI in outright overbought territory.

This podcast was recorded on 03 December 2023.

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