Welcome to another edition of Perspectives from Rothschild Co. My name is Laura Künlen, and for today's edition, I'm once again joined by our global investment strategists, Kevin Gardiner and Victor Balfour. So good to see you again, Kevin and Victor, after our short winter break. And I'm especially delighted to see that you've safely made it back to the island after your brief visit to Zurich last week, Kevin. Yep, it was remarkably smooth, Laura. Glad to hear that.
So, since this is our first recording of the year, why don't we take a moment to step back and talk about what we've been discussing as we move into 2024, Kevin.
Well, a big talking point at the start of the year, at least, um, in 2024 is politics and geopolitical issues. We've got the awful ongoing events in Ukraine and the Middle East. And later in the year, we've got a very important election, which I think we're going to talk about more later on. But from our point of view, the important thing we think to keep in mind about such events, even though they're hugely important to us as people, they don't always have a material impact on the global economy or on global capital markets. So even though this is going to be quite a loaded year geopolitically, it doesn't necessarily have to be the case that those are the things that will drive portfolios. Instead, what we think are most likely to drive portfolios are the same business cycle related issues that were driving portfolios mostly in 2023. And namely, will this remarkably favourable mix recently that we've enjoyed of a resilient economy alongside declining inflation continue into 2024? And if it does, that suggests that despite those geopolitical issues, this might not be that bad a year for markets.
And do you think we will be hearing the recession bells ringing this year then?
Well, it's possible. We're certainly not out of the woods yet. Although economies have been resilient, and look, the US economy was more than resilient, it actually had an above trend year last year. That's no guarantee that they'll continue to do well in 2024. But our feeling is that increasingly the two big headwinds that the global economy has been facing, which are higher energy costs, and rising interest rates, those two headwinds increasingly are becoming tailwinds. Energy prices have fallen a long way, particularly for natural gas in Europe, and interest rates have stopped rising and probably are about to begin falling. And those two things together suggest that it's quite possible 2024 also without a significant economic setback. Whether there is or isn't a technical recession. Well, technically there is a recession underway in Germany, at least at the moment. But our view has been that there needn't be a severe downturn, and we still think there is a very good chance of getting through this year without one.
How about politics then? 2024 is likely to go down as the year of elections, with nearly half of the world's population casting their votes. What are your thoughts on this, Victor?
Yes, you're right. I mean, from what I've read, anywhere between two and three billion people are heading to the polls this year, which I think is a record. Of course, you know, we had Taiwan a couple of weeks ago, and ahead we've got Pakistan, Indonesia, India, European parliamentary elections in around May time, and of course towards the end of the year we've got an election in the UK, but most important of all we've got the US presidential election on the 5th of November. Now, just a few comments on this. Trump clearly has a loss of momentum. He's invariably going to win his party's nomination in the primaries. He is ahead in the national polls when he's pitted against Biden, who obviously on the other side is pretty unpopular. He's in fact more unpopular than Trump was during his first term. However, we've still got 10 months to go, and this is far from a foregone conclusion. The polls are within a margin of error at the moment. You know, a handful of states, not just the popular vote will determine this race. Of course, having said that, you know, there is a great deal of unease about the idea of Trump once again in the Oval Office. From our side, and this may sound a little bit controversial, and this is certainly not an endorsement of his politics, but I think we can live with him another 4 years. It will be noisier and riskier, diplomatic relations maybe may intensify, but what he does might not necessarily hurt business that much. He's going to be constrained by a divided Congress, it seems. And I think the important thing for I think for investors is that really the economic backdrop in the direction of rates inflation et cetera, all matters more than the occupant of the White Housein terms of what it means for markets.
Talking about markets, how have they started off this year?
So, it's been a pretty mixed start to the year and of course it has been, it's a very short period. But so far stocks are up about 1%, bonds are down anywhere between 2 percent and 4%, depending on which market you look at. Elsewhere, commodities are flat. All prices are up about a 10th, though, and in effects, the dollar does seem to be strengthening at the moment that said, if we're looking at stock market specifically, we'll continue to see this kind of before this, this theme of kind of us outperformance, our listeners, you know, may recall that we saw this broadening of the market in the final few months of the year. However, really since the start of this year, we've seen a kind of return to type. If we're looking at global stocks, the US they are actually down modestly about 1%. And of course, looking at, you know, the kind of global regions and global sectors, about half of them are down amongst the majors since the start of 2024. Overall, you know, growth stocks are outperforming. So, we're still seeing this sort of theme of the magnificent seven. Really pulling, pulling ahead once again, albeit there is quite a bit of divergence among amongst that cohort. So, I think wrapping up a kind of patchy story overall. But of course we do have the promise of interest rate cuts alongside this gradual stabilization earnings. And of course, that may allow stock markets to continue trending higher from here.
And that brings me to my typical last question to you, Kevin, where does this leave us in terms of positioning and asset allocation then?
Well, if those political influences are not going to have a material impact on markets, at least for the time being, and if economic resilience alongside disinflation it's going to continue allowing interest rates to come down, then we should be pretty constructively positioned in our portfolios. And we are, we continue to favour equities over other asset classes. But for the first time in recent years, we're no longer underweight fixed income. We're now fully weighted at neutral position in bonds because they do offer, we think, decent value now, particularly if interest rates are about to begin declining. And we would be our least favourite asset class, I guess, would be cash or liquidity where we would be underweight. We do have ongoing discussions, obviously, at the asset allocation committee, not just about the asset allocation positions, but also about regional and segment. Positions within fixed income and within equities, for example. And there's a very active debate underway at the moment in terms of regional performance, where we know that we've been too positive for too long on emerging Asia. We've been equally positive on the U S which has worked, but that call on Asia hasn't worked. We're anticipating, uh, some ongoing discussions there through the early part of this year, at least. But generally, we want to stay reasonably constructively positioned in terms of client portfolios.
So, there's the saying as January goes, so goes the year. So, let's find out if that holds water in our next recording. Thanks very much to the both of you. Thanks, Laura.
If you want to find out more about the topics discussed in this episode, please go on www. rothschildandco.com/insights. Thank you for listening.
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