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The economic backdrop foreseen for the next 12 months suggests that the ongoing market correction will continue through the first half of 2023. In the second half of the year, we expect some of the headwinds to abate due to lower price pressures and a hold on interest rate rises. We believe this will support a gradual shift from a defensive stance, with its tilt towards gold, investment grade credit and government bonds, to increased risk exposure through developed market equity and high-quality credit.
Although full year 2024 returns for High Yield were strong and spreads tightened during the fourth quarter, fourth quarter returns were weak with losses in both October and December due to yield curve headwinds. While defaults have moderated over the last few months, Moody’s recently increased its year-end global speculative grade default by issuer forecast to 4.6% on weaker US employment. Moody’s also projects the global default rate by issuer count to decline steadily across 2025, reaching 2.7% by next November.
Markets have cheered any good news emerging in 2024 from the economy, corporate earnings and the political environment, although occasionally they were caught by surprise. Looking ahead, they will be driven by earnings momentum, a scenario of slowing US growth, and rebalancing labor markets. On the other hand, the Fed's more hawkish stance and Trump's approach to trade, along with the international response, could create volatility. Outside the US, European growth and policy-making, as well as China's response to its domestic problems, will drive the markets.
We anticipate fundamental market shifts in 2024 resulting from global dynamics and geopolitical events, and continue our agile emphasis on value, quality and growth across asset classes.
Look beyond near horizons to pockets of resilience and change in a transitioning economy.
Rate cuts in 2024 may be the catalyst for reducing portfolio risk by moving allocations to longer-term, higher-quality bonds.
Consider shifting equity holdings away from concentration risk by infusing quality across cyclicals, defensives and industries primed for the next-stage economy.
Market volatility is an expected undercurrent in 2024, and alternatives to traditional assets may offset the potential downside.
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