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Q1 2024

Capital Markets Outlook

February 2024

 

 

 

 

Highlights

Macro
  • Sharp move lower in long-term rates sparked the “everything” rally during the tail end of the year

  • Immaculate disinflation should give way to a soft landing, though not equally soft everywhere
Rates
  • Expect the fed and ECB to follow similar paths, but slower growth in the Eurozone may push the ECB to cut first

  • Investors with longer time horizons should benefit as rates fall
Credit
  • Strong backdrop for investment-grade credit
Emerging-Market Debt (EMD)
  • We see opportunities in EM corporates.
Equity
  • Stock markets gained as magnificent seven dominated returns

  • Stocks can perform well in moderate inflation environments
 
  1. Rates
  2. Credit
  3. EMD
  4. Equity

Macro

Inflation Continues to Decelerate, but the Pace of Progress Varies Across Geographies

Headline Inflation Has Declined from Recent Peaks
CPI year over year (percent)

As of November 30, 2023 (except Australia headline inflation, which is as of September 30, 2023)
Source: Bloomberg, Federal Reserve Bank of Atlanta, Office for National Statistics and AB

Core Inflation Is High, but We Are Seeing Signs of Progress
Core CPI year over year (percent)

As of November 30, 2023 (except Australia headline inflation, which is as of September 30, 2023)
Source: Bloomberg, Federal Reserve Bank of Atlanta, Office for National Statistics and AB

Current analysis does not guarantee future results.
All inflation measures are represented as year over year. Wage growth is represented by Atlanta Fed Wage Growth Tracker.

Rates

Expect the Fed and ECB to Follow Similar Paths, but Slower Growth in the Eurozone May Push the ECB to Cut First

We Expect Central Banks to Begin Cutting Rates at Some Point This Year
Current official rates vs. AB forecasts (percent)

As of December 31, 2023
Source: Bloomberg, European Central Bank, Goldman Sachs, US Federal Reserve and AB

Significantly Slower Growth in the Eurozone Could Lead to the ECB Cutting First, but the Fed Has Pivoted as Well
Central bank real GDP growth forecasts for 2024 (percent)

As of December 31, 2023
Source: Bloomberg, European Central Bank, Goldman Sachs, US Federal Reserve and AB

Current analysis and forecasts do not guarantee future results.
Market expectations are measured by overnight index swaps (Australia forecasts are measured by futures).

Credit

Strong Backdrop for Investment-Grade Credit

Even in a Recessionary Environment, US IG Interest Coverage Can Remain Well Above GFC Levels
EBITDA/interest expense

As of September 30, 2023
Source: Bloomberg, Morgan Stanley and AB

US Spreads Are Tight, but Yields Are Compelling; the Treasury Component Cushions Returns in Times of Stress
Percent

Through December 31, 2023
Source: Bloomberg, Morgan Stanley and AB

Historical analysis does not guarantee future results.
IG: investment-grade; GFC: global financial crisis; EBITDA: earnings before interest, taxes, depreciation and amortization; YTW: yield to worst; OAS: option-adjusted spread. Numbers may not sum due to rounding.
*Tsy Ret.: duration-neutral Treasury return

EMD

We See Opportunities in Emerging Markets

EM Corporate Sharpe Ratios Remain Attractive (2013–2023)

As of December 31, 2023
Source: Bank of America, Bloomberg, J.P. Morgan and AB

EM Corporates Have Lower Leverage than Their DM Counterparts

As of June 30, 2023
Source: Bank of America, Bloomberg, J.P. Morgan and AB

Global Duration Trends May Be a Tailwind for Local Rates as the Year Progresses

As of December 31, 2023
Source: Bank of America, Bloomberg, J.P. Morgan and AB

Current analysis and forecasts do not guarantee future results.
EM: emerging-market; IG: investment-grade; DM: developed-market; bps: basis points

Equity

Stock Markets Gained as Magnificent Seven Dominated Returns

Global Stocks
Indexed to 100 on January 1, 2023

As of December 31, 2023
Source: FactSet, FTSE Russell, International Data Corporation, MSCI, S&P and AB

Regional Returns:* Jan–Dec 2023
USD (percent)

As of December 31, 2023
Source: FactSet, FTSE Russell, International Data Corporation, MSCI, S&P and AB

Past performance and current analysis do not guarantee future results.
*Nasdaq represented by Nasdaq Composite, US large-caps by S&P 500, Europe ex-UK by MSCI Europe ex UK, Japan by MSCI Japan, US small-caps by Russell 2000, Australia by MSCI Australia, UK by MSCI UK, Emerging Markets by MSCI Emerging Markets and China by MSCI China A.

© AllianceBernstein L.P.