Positive momentum for risk assets in Q1

Economists are looking for signs that the UK’s economy has officially tipped into recession, with data being published this week (https://www.ons.gov.uk/releasecalendar?view=upcoming); however, for those looking to risk assets and equity markets there are other factors to consider, says Javier de Berenguer:

“Although momentum is positive, the question is whether it will remain so. This depends on the magnitude of the cuts by central banks and when they occur. There are also two other factors: geopolitical conflicts and US economic growth, which could lead the Fed to maintain high rates for longer.”

Javier has also called time on “German hegemony” in the eurozone: “The golden period in Germany has probably passed and there will be other countries taking over. Being a partner of China, as Germany is, isn’t good news. It’s changed its economic model and is targeting other sectors with greater added value. Germany has been left without a partner to keep costs under control.”

Positive momentum for risk assets: factors to be monitored in Q1

The current market situation is positively affecting risk assets: analysts discounted a recession in 2023 that hasn’t occurred, inflation is falling and we’re seeing a significant improvement in financial conditions. But will this scenario continue in the coming months?

“Although momentum is positive, the question is whether it will remain so. This depends on the magnitude of the cuts by central banks and when they occur. There are also two other factors: geopolitical conflicts and US economic growth, which could lead the Fed to maintain high rates for longer,” explains Javier de Berenguer, investment manager and fund selector at MAPFRE Gestión Patrimonial (MGP).

Monetary policy was the main market driver in 2023 and everything points to it continuing like that this year, with investors and analysts on hold for a rate cut. At its January meetings, both the Fed and the European Central Bank (ECB) decided to keep rates at current levels. “At MAPFRE, we’ve always been very prudent when it comes to rate cuts and the rapid inflation moderation. We do think that the ECB will cut rates before the Fed, and has all the arguments to do so. We are in no doubt that there will be cuts before the summer, but they won’t be of an exaggerated magnitude as long as there’s no dramatic fall or real slowdown in inflation moderation,” says De Berenguer.

Daniel Gómez, a fixed income manager at MAPFRE AM, believes that an improvement in the European macroeconomic environment and growth expectations would push European equity markets upward. “If we’re able to recover growth and private consumption expectations in Europe, together with the positive effect of rate cuts when they materialize, there could be a turning point for the European stock markets, which in relative terms seems more attractive than the US,” he said.

As far as fixed income goes, Gómez predicts better performance in Q2, after a lackluster start to the year, mainly due to the change in the expected calendar for interest rate cuts by central banks.

In this market context, MGP has extended durations in fixed income, while in equities, it sees opportunities in the health and basic consumption sector, which is lagging behind in valuations. “In equities, we don’t like entering into sectors where there is a certain market trend. There are also opportunities to be found beyond the Magnificent Seven,” said De Berenguer.

The end of German hegemony?

The eurozone is showing greater economic weakness than the United States, although it has managed to avoid recession by recording a GDP variation of 0% in Q4 of 2023. Germany is one of the countries that is suffering most from this weakness, compared to other economies, such as Spain and Portugal. “The golden period in Germany has probably passed and there will be other countries taking over,” says De Berenguer.

The fund manager and selector also refers to the country’s relationship with China. “Being a partner of China, as Germany is, isn’t good news. It’s changed its economic model and is targeting other sectors with greater added value. Germany has been left without a partner to keep costs under control,” he adds.

Currencies and raw materials

In the current market environment, Gómez explains that raw materials offer diversification in the asset portfolio. “From a historical point of view, they’re listed at the bottom of the range. If the economy continues to recover, raw materials are a very important asset to bear in mind. If the feared inflationary spikes occur, they offer protection.”

The dollar stands out in the currency market, thanks to the growth shown by the US economy, which suggests the currency will appreciate further in the coming months.

 
Javier de Berenguer is investment manager and fund selector at MAPFRE Gestión Patrimonial (MGP), part of MAPFRE,