Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Executive summary
Saxo
Summary: Central banks will embark on rate cuts in 2024, marking a shift from the tightening stance in the previous year. Opportunities will arise in precious metals, equity themes such as defence and value stocks, higher duration sovereign bonds, and a weaker USD. Geopolitical tensions and populism in politics loom as significant risk factors, necessitating close monitoring.
In Q4 of last year we called for investors to take a long position on bonds as we recognised that the global economy cannot deal with historically high real yields, as productivity and population growth are simply not high enough. With a historically long lag to monetary policy, the high bond yields in 2023 are finally beginning to bite and central banks are priced to cut policy rates in 2024, changing the underlying dynamics.
The 2024 investment landscape is complex and challenging, presenting investors with a multitude of risks and uncertainties. Nevertheless, opportunities remain amid the turmoil. On the equity front, investors should embrace the prospect of emerging markets like India, Mexico, Brazil, and Vietnam. These markets are poised for growth as a result of the global reshoring trend. However, investors should exercise caution towards US mega caps as their valuations are unsustainable.
On the fixed income front, investors should position for a bull steepening of the yield curve and extend duration of their bond portfolios to benefit from this trend. Cautiousness is warranted for investment grade and high yield bonds given unattractive spreads over sovereigns, as economic activity could decelerate. The currency markets are expected to witness a weakening US dollar in 2024. The EURUSD could potentially reach 1.12 in early Q1, while EURJPY and GBPJPY could remain supported. On the other hand, Asian currencies could rebound if the USD weakens and China shows signs of recovery.
In commodities, precious metals are poised for renewed demand as the Fed Funds Rate and real yields are likely to decline. Platinum is projected to experience more deficits and tight market conditions. Copper remains bullish for 2024 due to the prospect of a supply deficit.
Geopolitics is expected to play a significant role in the global economy and financial markets in 2024. The rise of populist sentiment, driven by economic discontent and the perceived failure of traditional centre parties, is another key factor to consider. Investing in China is challenging, but presents opportunities in technology, advanced manufacturing, energy, and green metals. The Third Plenum will be a crucial indicator of China's development strategies for the medium term.
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