Risky Assets are not yet out of the woods

Good afternoon. I’m Javier Corominas, Director of Global Macro Strategy here at Oxford Economics. Today we will be reviewing our 2024 top strategy themes. As our colleagues have mentioned elsewhere, our growth forecasts are below consensus globally, and we believe that the peak effects of that policy tightening are still ahead. This supports our cautious stance as we expect the EPS recovery to disappoint and balance sheets to continue to remain under pressure.

In credit, we think the resilience of US high yield spreads is unlikely to last and we expect them to widen next year, albeit by a modest 75bps-100bps by year end. This is on the back of a default rate, which we expect to surprise markets on the upside. In fact, we pencil in a default rate for the generic high yield index in the order of 2%-2.5% next year.

Inflation trends will also continue to diverge. The eurozone will expect and experience a stronger disinflation elsewhere, fueling our bull steepening view for bonds, but also safer European government bonds. That being said, however, a lower inflation should also help pave the way for recovery in the second half of the year and lead to a rerating of eurozone small cap stocks, which trade on attractive valuations.

Small caps are indeed likely to be the outsized beneficiaries of ECB rate cuts, as they are more reliant on bank lending than their large cap counterparts. We also see some other pockets of opportunity in more tactical trades. In particular, we see merits in being bullish yen on cyclical and also valuation grounds. But we will have to wait until the second half of 2024 when the global rate cycle finally peaks to start seeing those yen gains.

However, we think the unhedged foreign investors will continue to see decent returns throughout the whole year in Japanese equities.