Global Markets Outlook - Inflation, interest rates and equities: where to next?
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Global Markets Outlook – Inflation, interest rates and equities: where to next?

The turnround of the US economy, starting last year, has been the most dramatic, while the UK and European economies stagnated. Yet inflation has fallen throughout the developed world and wage inflation is following suit, though there has been no rise of unemployment, even during the ‘technical recession’ in the UK.

Low unemployment has removed the pressure on central banks to make urgent cuts. However, we already see clear signs that wage inflation is on track to fall into line with central banks’ inflation targets. Therefore, we expect that interest rates will be cut more than currently discounted by investors.

Elections are an important consideration for investors this year. With the race for US President and Senate too close to call, the radical agenda of the Trump 2025 project contrasts with the more familiar prospect of a second Biden term. In the UK election, Labour is the clear favourite, but also has a surprisingly radical agenda.

Falling inflation and lower interest rates will support returns from both bonds and equities. Equities will also gain from the economic boost from those same interest rate cuts. However relative valuations are in favour of bonds.

UK moves ahead on economic surveys

Figure 1: Composite Purchasing Manager's Indices
composite purchasing manager's indices

Source: Columbia Threadneedle Investments and Bloomberg as at 26 February 2024

The US economy loses momentum, but remains on track.

Last year the US economy was the biggest upside surprise to growth. This year we expect it to be a mild disappointment.

The US consumer has spent down their ‘Covid piggy bank’ and so future spending growth is likely to lag growth in earnings as savings are rebuilt. US inflation, having fallen sharply, may be slower to fall further as the tight rental market represents a huge proportion of the consumer price index versus the smaller (and more realistic) weighting for the UK and euro zone.

That loss of momentum of the US economy does help to push down hiring and wage inflation and should be sufficient to persuade the Federal Reserve (Fed) that it can start cutting interest rates.

We see little risk of a recession as wage rises are still running ahead of falling consumer inflation, providing US consumers with real income gains. Financial conditions have eased, and interest rates cuts should further support confidence.

Figure 2: US business hiring plans are tumbling
nfib small business hiring plans

Source: Columbia Threadneedle Investments, Bloomberg and Macrobond as of 19/03/2024

The consensus on the UK economy remains too pessimistic.

A solid, if unspectacular, UK recovery is my largest out-of-consensus call, but the one in which I have most confidence.

UK wage growth is currently rapid on a year-on-year basis and the 9.8% hike in the minimum wage is imminent. That is a potential problem for inflation and the Bank of England. However, consumer price inflation is set to move down to the Bank of England’s target and remain there for the next 12 months. Indeed, it is likely to fall significantly below the 2% target in the next few months.

Wages outstripping falling inflation will deliver a much-needed boost to real incomes. But UK consumers could easily increase spending even more if they cut back their level of savings from current peak levels.

We can already see the impact of these positive factors in the dramatic turn round of the UK housing market. I had originally forecast a 10% fall in house prices, peak to trough. However, the market only fell 5% and I now expect those losses to have been reversed by the end of the year.

Figure 3: Housing set to recover

Source: Columbia Threadneedle Investments and Bloomberg as at 19 March 2024. RICS = Royal Institution of Chartered Surveyors

Falling inflation to boost real wages and allow for interest rate cuts in Europe as well

You get a misleading impression of the strength of the European economy if you look at the slump in Germany, particularly German manufacturing. Elsewhere, such as Spain, the consumer has been more positive.

Wage growth is currently far too high. However, the spring wage round is likely to produce a sharp reduction that will put the European Central Bank (ECB) in a position to cut interest rates at its June meeting.

Those wage increases, especially by comparison with falling inflation and energy bills, will deliver a recovery in real incomes after a tough period for the consumer. Consumer spending could easily anticipate further gains in purchasing power if rising confidence allows consumers to spend some of their accumulated savings.

Figure 3: Euro Area, indicator of negotiated wages %yoy
euro area indicator of negotiated wages

Source: Columbia Threadneedle Investments and Macrobond as at 19/03/2024

Lower interest rates make bonds and equities attractive; gold to shine.

Continued growth, falling inflation and interest rate cuts provide a positive background for investment returns. We like both equities and bonds, though relative valuations make us prefer bonds.

Valuations suggest that equities are expensive, and they could become more so over the next 12 months. That valuation gap for US equities is largely the result of the ‘Magnificent Seven’ which have driven margin and profits growth while the remainder of the S&P 500 has seen a net decline. However not all of the Magnificent Seven appear equally magnificent, we prefer the strong profits growth from the developing AI market.

A valuation gap has also appeared for gold. The gold price has risen in defiance of higher interest rates that would normally reduce its attractiveness. We see a fundamental shift in demand after the freezing of Russian foreign currency reserves and some 2000 related individuals and entities. The recent decision to apply the interest from some accounts to the reconstruction of Ukraine confirms the shifting nature of ‘safe haven’ assets and that is likely to favour gold.

Figure 4: Gold up by 31% since Feb '22 despite adverse fundamentals
US10 year TIPS yield

Source: Columbia Threadneedle Investments, Bloomberg and Macrobond as of 19/03/2024

29 März 2024
Steven Bell
Steven Bell
Chief Economist, EMEA
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Global Markets Outlook – Inflation, interest rates and equities: where to next?

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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