Beyond the Headlines | 23 Feb 2024

Long run drivers of EM convergence | Beyond the Headlines

Gabriel Sterne

Head of Global Emerging Markets

Our latest video for asset managers

We see the current conjuncture as representing a sweet spot for emerging market assets as disinflation is secure, activity is turning up, valuations are generally attractive, and global financial conditions appear supportive.

In this week’s Beyond the Headlines, join Gabriel Sterne, Head of Global Emerging Markets, highlight why long run views are particularly potent right now during the Inaugural Global Economic Outlook Conference in London.

Click here to check out previous Beyond the Headlines episodes.

I’m here today to talk about our Global Asset Allocation for 2024. We’re much more sanguine on global growth and consensus, in particular on US growth. And that has certainly translated this month, in our view, for the months ahead in terms of a more pro risk stance for risk assets relative to safe assets, as you can see here.

Now this view is slightly nuanced in the sense that we’re not just sort of saying gold on equities versus bonds. We do have a sort of intra asset class calls here on across asset perspective. So, for example, we prefer a DM. We’re underweight DM equities versus EM equities. We’re also underweight DM bonds versus EM bonds, and we prefer high yield credit to equities overall.

Now, one of the things that helps us guide us as well as our colleagues macro views is the fact that we have our cross asset frameworks here, which also point to a pro risk stance. So that’s our Global Asset Allocation overall, moving to a pro risk stance.

So, you know, our analysis shows that you as you will have seen from our macro colleagues this morning, that households are not particularly stretched at the moment, debt service ratios continue to be manageable.

Our household financial balance model which incorporates the unemployment rate and other factors such as the financial obligations ratio has seen, is consistent with the retrenchment that we’ve seen a bit in in the sort of consumer balance sheets. But we expect that to have already petered out as we speak and things will improve going forward in terms of households.

For corporates, it’s pretty much the same mix of the terming out of debt, especially during the post-pandemic period in the early sort of months has meant that corporate balance sheets have stabilized and we think corporates are actually in a better shape than markets may expect.

So we expect the speculative default rate really to not reach more than 5% to be in the sort of four and a half to 5% range throughout this year. And that is obviously much lower than recession peaks we’ve seen in the past.

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