Banca Generali: the 2024 compass for investment decisions

2024 will be another year of uncertainty for markets squeezed between still high inflation, conflicts in Ukraine and the Gaza Strip, and volatility that certainly will not disappear. But Banca Generali is able to lay out some guidelines that can be used as a compass to navigate the labyrinth of prudent, forward-looking investment choices.

First of all, the one coming up will be the year of the first rate cuts after more than a year of sharp rises and that will indirectly cause a global slowdown but not a recession creating what in technical jargon is called "soft lending." In this scenario, the bond remains attractive although the must in portfolio construction will be, again, diversification. Let's see in detail.

"The year 2024 will be the turning point for the restrictive monetary policies operated so far by the major central banks of developed countries, which will follow the steps taken by many monetary institutions in emerging countries, already engaged in the first cuts in their benchmark rates," comments Generoso Perrotta, Head of Financial Advisory at Banca Generali.

The disinflation trend is likely to continue during 2024, but with a slower pace of decline in the rate of price growth than observed so far and a return to levels consistent with the objectives of the central banks of the major economies only by the end of 2025. "This implies that conditions for a first easing of monetary policies could occur from the second half of 2024," the expert further points out.

The impact of such a scenario on global growth is expected to lead to a slowdown in 2024, but not to a global recession: thus, a Soft Landing scenario is projected for next year.

Within global expectations, divergence in the growth rates of various countries will increase, with greater development in emerging economies, where monetary policies are already loosening, than in advanced economies, which are characterized by still unaccommodating monetary policy approaches.

Among developed countries, the growth of the Eurozone economy is likely to be more subdued than that of the United States and major Asian economies.

"The intensification of geopolitical tensions is a major source of concern for financial markets because of the potential negative impacts on the disinflation trend and the consequent impact on the decisions of central banks, which may be forced to hold benchmark rates steady for a longer period than expected. The main risks to the global growth outlook remain, therefore, tilted to the downside," Perrotta notes.

Choices for investment in 2024 move from the macroeconomic scenario and risks just outlined.

As of today, the market is discounting possible action to cut benchmark rates in major economies in early 2024. Adjustment of these expectations could lead to a phase of volatility in yields.

"However, the bond market is still believed to offer attractive levels of carry, which could be complemented by positive capital account returns as the decline in inflation progresses and as the first cuts in benchmark rates by major central banks materialize," the expert adds.

In light of these considerations, we advocate an overweight positioning on the bond asset class. The divergence of growth rates between countries, the possible asynchrony of the major central banks and the consequent impact on the different government curves implies the need to approach bond investment with a wide geographic diversification, favoring from time to time those markets where the combination of carry and potential capital appreciation will be most attractive.

"Recent economic data published globally have confirmed how the growth outlook for the world economy in the latter part of 2023 and the first part of 2024 is worsening. This could lead analysts to revise downward their estimates of earnings performance in 2024, which, as is usual, seem to be too optimistic at the moment, making equity market valuations even more expensive, while reducing investors' appetite for risk," Perrotta further notes.

Expectations of a possible reversal of restrictive monetary policy by the Federal Reserve and the European Central Bank over the next year may only partially offset the negative impact of the economic slowdown, considering also that the response of central banks to the downturn may be slow due to continuing concerns about the inflation outlook.

"In such a scenario we lean toward a neutral positioning on global equities," he adds. There has been a significant polarization of performance during 2023, a consequence of the concentration of some markets in certain segments. Factoring in what has already been incorporated into prices, again, as much diversification as possible in terms of geography and sector is recommended.

"Finally, we recommend taking advantage of future phases of volatility to invest more profitably in both the bond and stock markets," the Head of Financial Advisoy continues.

Within a portfolio construction that is as diversified as possible, the geographic aspect is accompanied by a currency component, to be implemented on the equity and bond side according to various dynamics.

"This approach to portfolio management is in line with what was built and recommended in 2023, a year in which Banca Generali's clients were able to benefit from the significant returns achieved by the markets, thanks to the indication to remain invested, in the belief that the global recession expected by many did not represent the central scenario of the major international bodies and that there was therefore room for an upward revision of corporate earnings with a consequent positive impact on financial market prices," he concludes.