51 min 4Q23 Outlook Growth Inflation Rates Policy Asset Allocation
Rui Zhang
Partner & CEO
Irostors Limited

IMs' Q4 Outlook Reveals Cautious Stance Amid Recession Expectations

Major investment managers have released their 4Q and longer-term investment outlooks over the past month and a half. We have meticulously dissected them and prepared a summary of their views on the growth outlook, inflation expectations, rate policies, equity and fixed income markets outlook. To read a specific outlook, please click on the manager’s name in the article. Hopefully, our work can be helpful to you in preparing for the year to come.

4Q Onwards Growth Outlook

Most investment managers (IMs) reviewed have not changed their growth outlook. BlackRock, Fidelity International, Bridgewater Associates, Neuberger Berman, and others lean towards a cautious or pessimistic view for Q4 2023 and beyond, anticipating either a mild recession or a notable slowdown.


In the US, IMs believe that monetary tightening and the waning impact of fiscal policy will eventually drag the economy into an outright or mild recession. They point to early signs that the labor market is softening, household wealth is declining, economic output growth is near zero and lending conditions have tightened. Interesting remarks come from BlackRock and Bridgewater. BlackRock thinks that the low US unemployment is the result of the US aging population, they estimate that the US economy can only add 70k jobs (one-third of what it used to) before it stokes higher inflation. Bridgewater thinks that the reason why the impact of the monetary tightening has been so muted is the mechanics of the Fed reverse repo tool that essentially funded the Biden administration’s fiscal stimulus for “free”.


In Europe, the views are generally more pessimistic compared to the US except for Aegon AM and Deutsche Bank Wealth Management. Most IMs think that, due to higher inflation, higher reliance on external energy supply, and higher dependency on exports to China, Europe cannot avoid a recession, if not already in one. Deutsche Bank Wealth Management sees a path for Europe to avoid recession although only recording anemic growth. It thinks that private consumption can rise driven by higher wages and declining headline inflation. Aegon AM believes in a similar possibility with additional drivers such as looser financial conditions and stronger external demand.


Most IMs discussed China extensively, therefore we allocated a dedicated section at the end of this article.


Inflation Expectations

There seems to be a consensus that inflation is on a declining path, however, the question has shifted to the pace, the smoothness of the decline, and the ending level of inflation. The tone for many IMs is cautious as inflation has been historically a wild animal to tame for central banks. Geopolitics, supply chain reorganization, demographics, and their potential compounding effects are all reasons why disinflation can run off track. PGIM underlines that Europe will struggle with inflation as the rise in energy prices since the Russo-Ukrainian war continues to work its way through non-energy goods and services. BlackRock ties its view on inflation back to aging demographics and their impact on the labor market in the US. Bridgewater has a similar view but also includes Europe. Fidelity International highlights that industrials and communication services still face significant supply chain bottlenecks and warns against hidden inflation pressure.


Monetary Policy

The “higher for longer” is anchored and consistent with the view on inflation. IMs' consensus is that the Fed and ECB are either at the end or near the end of their hiking cycle, however, they will maintain higher rates into 2024 to avoid a flare-up in inflation.


In the US, the relative strength of the economy also prevents most of the IMs from taking a dovish view of the Fed’s next decisions. Rate cuts are likely to be cautious and potentially begin in the latter half of 2024 or even 2025. For example, PGIM sees only 50-75 bps rate cutes in 2024, as a context the Fed hiked 425 bps in 2022 and 100 bps so far in 2023. In Europe, it is the higher and stickier inflation that keeps IM more conservative on the ECB’s next decision. HSBC Global Private Banking, for example, does not exclude another hike for the ECB while it sees the Fed hiking cycle is over.


Equity Outlook

With few exceptions, IMs are cautious about the equity market with a neutral to underweight stance. IMs, such as Neuberger Berman, Invesco, and Nuveen, maintained or increased their defensive stance preferring quality, infrastructure, or large-cap stocks. The views are largely driven by expectations for greater volatility given the recession risk on the horizon.


Except for HSBC Global Private Banking all the IMs reviewed are underweight US equities. They believe that US equities are overvalued given year-to-date rallies, and that earnings expectations are too high and do not reflect the negative macroeconomic outlook. Some IMs, such as Neuberger Berman, continue to question the fundamental driver of the rally, in particular the lack of breath. Many others insist that contrary to fixed income US equities do not offer sufficient risk premium, therefore the risk/reward profile looks poor.


The views on European equities are more benign but few IMs assert an overweight. While many recognize the cheaper valuation compared to the US, the more challenging growth outlook warrants aggressive allocation. DB Wealth Management is one of the few with a more pronounced risk-taking in Europe. Russell Investments thinks that the strength of the US dollar is a caveat for non-US developed market cheapness, therefore they are neutral on Europe.


Compared to the US and Europe, Japan and emerging market equities are relatively more in favor. For example, BlackRock and Deutsche Bank Wealth Management are very optimistic for Japan on the back of stronger growth forecasts that can top market earnings expectations. They also think that Japanese market liquidity may continue to be supported by foreign investors given the shareholder-friendly actions. The positive views on emerging market equities are supported by cheaper valuation and their central banks entered a rate cut cycle. For example, Aegon AM estimated in early Oct that EMs were trading at ~30% discount versus DMs based on the 12-month forward earnings multiple. In general, Brazil and Mexico were the often-cited names for EM country picks.


Fixed Income Outlook

DM Sovereign Bonds: There's a general favor towards short-dated sovereign bonds. For instance, BlackRock is optimistic about U.S., UK, and euro area government bonds, especially where yields have spiked, while Russell Investments sees value in U.S., UK, and German bonds, anticipating potential rallies once the central banks turn dovish. Nuveen suggests that the interest rate environment may be less volatile, presenting an opportunity to extend the bond duration and create a more durable yield profile. This view is also relayed by Invesco, American Century, but Bridgewater and BlackRock disagree. Bridgewater sees oversupply as the US Treasury shifts its issuance strategy from short-term to longer-term bonds. Finally, BlackRock thinks that markets are mispricing the persistent inflation, the higher-for-longer rates, and the higher debt load of the US government.


Corporate Bonds: The outlook for corporate bonds is mixed but skewed towards quality. BlackRock, PIMCO, Nuveen, and American Century maintain a cautious approach to corporate credits due to unattractive pricing given the recession risks. The sentiment is split on investment grade (IG) corporate bonds. Man Group is very selective, sticking to Europe IG financials on better fundamentals vs their US peers, and warrants caution towards other cyclical IG bonds in light of the economic slowdown. Conversely, DB Wealth Management is positive on both US and Europe investment-grade corporate (IG) as their economic outlook is more optimistic, while Goldman Sachs Asset Management views US IG bonds favorably as it assesses the fundamentals to be solid and capable of withstanding higher funding costs. The sentiment is predominantly cautious regarding high-yield corporate bonds (HY). BlackRock is underweight as it considers the spreads particularly tight in the HY space, therefore not compensating for its expectations of slower growth and tighter credit conditions. Russell Investments echoes this view, pointing to HY's below-average spreads to Treasuries. DB Wealth Management points out that default rates for both USD HY and EUR HY have picked up and will probably climb as issuers struggle to refinance at higher costs. Man Group is particularly wary, suggesting higher risk premiums will be needed for cyclical HY sectors. Finally, opinions on EM corporate bonds are selective and region-specific. While American Century is positive on Mexico, Indonesia, Brazil, and South Africa, it prefers to stick to high quality credits in the electric, construction and machinery, food and beverage, and consumer products industries. Man Group sees valuation in EM corporate bonds as being fair and even tight once China is stripped out of the analysis. Therefore, it is very selective, liking some China industrials and Macau gaming, Mexican banks, and Brazilian oil field services to name a few examples.


On China

IMs perspectives are overall very nuanced reflecting a blend of opportunity, cautious optimism, and concerns for structural challenges.


Many IMs recognize the cheapness of the China market. Invesco outright identified Chinese equities as its best-in-class assets based on 12 12-month projected returns. BlackRock also recognizes that valuations have come down.  Lazard Asset Management highlights that investors have recently shown interest in China following policy support announcements. Yet, they are still wondering whether the central government can stabilize the growth trajectory without the need for a massive stimulus package.


Fidelity International International sees mass stimulus to be unlikely given the government’s concern over debt level, however, it denotes positive signs in consumer confidence and certain sectors such as services, semiconductors, and renewables. Abrdn thinks that comparing China to the 90s Japan is overly pessimistic. Although aging, Chinese demographics are far from an imminent collapse while urbanization still has more room to run. Allianz GI believes that the government has sufficient tools to manage the current challenges, although the time needed to work through those challenges may be long.  GSAM highlights that credit challenges at the local government level may cap domestic resources to re-ignite growth while moderating global growth and supply chain shifts will limit support from external demand. PIMCO does not exclude that Chinese growth for 2024 could further decelerate to 3% vs their base case of 4.4%. Aegon AM expects long-term GDP growth to be 3-4%, underlining that the IMF’s forecast is below 4% in the coming years.


Fundamentally, many IMs consider China to be at a strategic crossroads. The need to ensure financial stability, gain geopolitical weight, and shift the growth model narrows the spectrum of tools available to the government. Therefore, more time may be needed to restart the growth engine. Bridgewater foresees a long-term deleveraging process in China with limited stimulus due to increased political risks. It predicts policy will remain easy but cautious. Aegon AM thinks that the US-China tensions are unlikely to abate considering the recent behaviors on both sides.

We hope this brief summary gave you an informed view of the latest investment intentions of major institutional investors and can be constructive for your internal and external discussions. Irostors is the first SaaS platform that helps IROs and CFOs simplify investor targeting through IR data. Feel free to contact us to discuss our solutions.

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Companies mentioned
PGIM Russell Investments American Century Bridgewater Associates PIMCO Aegon AM Allianz GI BlackRock Man Group abrdn HSBC Global Private Banking Deutsche Bank Wealth Management GSAM Lazard Asset Management Fidelity International Invesco Nuveen Neuberger Berman

Sectors mentioned

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