Investment Outlook - Market Update

Investors entered 2024 with investor sentiment very positive, centered on expectations for 6 US interest rate cuts, materially lower inflation and no US recession. At KBI, we were less sanguine expecting all would not prove to be smooth-sailing and we expected periods of sentiment ‘flip-flopping’ where for example, once again the worry would be that inflation was too strong, or perhaps a period that growth is too weak. And now as the second quarter beckons, inflation and growth have indeed demonstrated to be too strong, and the happy investor consensus has rapidly repriced expectations to now 2 or max 3 rate cuts for 2024 with some even pondering no rate cuts!! Despite this change, risk assets have performed, turning a blind eye to the changed interest rate expectations and instead relying on hopes for better economic growth and earnings.

It is fascinating to note with global news headlines dominated by a ‘risks everywhere’ narrative, global stock-markets are on happy pills and paying little or no attention to risk. Behaviourally investors are displaying strong evidence of FOMO (fear of missing out) with momentum the big winner YTD . The trend is your friend…until it isn’t, and we note mean reversals do happen and are painful!

At KBI, our outlook remains less sanguine than consensus. The world politically and economically is not without risks, risks that lurk beneath the surface and are certainly not priced into markets we feel.  Our view is that with less rate cuts to be expected and actual interest rates being higher for longer that growth will be slower than consensus expects and that an eventual mild recession (rather than soft landing) is still likely. We are also mindful that as 2024 progresses political risk will come into focus, with not just the US Presidential election but upwards of 40 elections scheduled globally. This causes us to be less bullish overall, more defensive in our positioning and suggests an expected market background against which risk assets could struggle.

From a secular perspective, we continue to re-iterate that despite the markets short-term focus that we are in a period of ‘regime change’. A regime where its likely to be a world where 2% inflation is a floor rather than the ceiling and where higher rather than lower interest rates and bond yields should be expected as the norm.

Asset class outlook:


As happened during 2023, the market returns YTD in 2024 have generally exceeded earnings growth, and as a result, market valuations are now at an aggregate level trading above historic averages and cannot be described as cheap. While momentum sentiment and hope for a better future can drive such re-ratings, eventually fundamentals do matter and for 2024 as a whole, markets should be more driven by fundamentals than hype.

I do note a broadening of the rally over recent weeks away from the momentum driven US dominated Magnificent 7 names towards more cyclical sectors and including regions such as Europe and Japan. Indeed, a fragmentation has begun across these 7 names themselves with the likes of Tesla suffering while Nvidia has been the dominant winner YTD. We highlight that within equity markets there are large valuation disparities with excessive valuations in growthier sectors such as the artificial intelligence names compared to very attractive entry points for value or higher yielding sectors, such as utilities for example. Our economic scenario of a likely mild recession and avoiding a hard landing should be a catalyst for a rotation and broadening of performance across the market an environment that should suit good stock picking.

At a regional level we continue to note that the North American equity market in aggregate looks the most expensive compared to history. In contrast, European and the strongly out of favour Emerging Market equity markets look much more attractively valued.


Bonds as an asset class have experienced two difficult back-to-back years of performance during 2022 & 2023 and have struggled again YTD. This is not a surprise to those of us who have believed in regime change and the need for bond yields to be and remain higher and away from the emergency levels of the deflationary era. Noting that the aggressive central bank rate rising environment is now behind us the outlook is less hostile. That said, we aren’t particularly bullish on the outlook for bonds, noting yield levels that are more fairly valued to us, than cheap. It is also worth highlighting that bond and equity markets have de-coupled from each other YTD

Risk wise, we continue to monitor corporate bond markets for any signs of distress at a company or indeed sectoral level. We watch spreads that to date have shown very little if any signs of stress. That said with risks lurking they could be vulnerable in the period ahead


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