Favorable environment for medium-term bonds – Le Revenu

Investors are gearing up for a New Year’s Eve binge. In fact, they all have reason to be in the holiday spirit. There has been a small pause since the market recovery that began at the end of October, which recently set new records.

This is especially the case on Wall Street: the Dow Jones hit an all-time high after the Federal Reserve’s monetary policy committee met on December 13. That allayed fears of a new turn of the screw and even hinted at three key rate cuts next year, according to the Fed’s new projections.

European markets were not left out either: the CAC 40 index and its German counterpart (DAX) also broke records at the end of last week, although the ECB’s decision to keep its rates unchanged was accompanied by a rather cautious report.

Many managers were caught off guard by this rise in the stock market. “While the end of the year generally leads to the unwinding of the riskiest positions, this time the opposite happened,” notes Éric Turjeman, co-director of OFI Invest Asset Management. Most participants who sold short bought back their “short” positions after the relative easing of the geopolitical risk premium and especially the recent positive inflation surprises.

High appreciation

In the face of a changing economic and financial environment, the market is more than ever driven by expectations about the actions of central banks. After peak interest rates are reached, speculation is rife again about the start of monetary easing during the second quarter of 2024 (interview below). This prospect of disinflation combined with an economic slowdown can only benefit bond markets. They have also performed very well since the end of October, with yield declines seen across the entire yield curve. However, for some experts, it will be difficult to extend these performances in the coming weeks. The bond rally “deserves to be paid off in the short term”, suggests Éric Bertrand, CEO of OFI Invest AM, who switched to a “neutral” view on government bond rates. However, the potential remains significant in the medium term. After the 2022 crash, these markets could be big winners next year.

On the equity side, risks are higher given the general context of an economic slowdown. According to Daniel Morris, director of strategy at BNP Paribas Asset Management, caution remains necessary given the relatively high valuations. This is especially important for consumer-related companies in the United States, which are facing weakening demand. Profit forecasts for the construction, durable goods and temporary employment sectors are therefore revised downwards.

Stock market rotation

Some “blue chips” that have been heavily attacked since the summer, however, have recently regained strength (Nike, Caterpillar, etc.). Others that weathered the October stock market correction very well are now less sought after. This is true for aerospace and defense stocks, as well as oil stocks – which have suffered from the drop in oil prices.

Since last month, there has been a rotation on the stock exchanges in favor of sub-funds and securities neglected throughout the year, emphasizes Éric Turjeman. Whether it’s small and mid-caps, “so far penalized by dependence on financial markets and their cyclical nature,” industry groups disappointed in the latest episodes of quarterly publications, or real estate companies “entangled in the subjects of renegotiation of balance sheet liabilities and asset valuations.” For many of these stocks, the rebound displayed during the month is surprising in its magnitude.

For exampleUnibail-Rodamco-Westfield, has topped the CAC 40 for the past two months with a nearly 60% increase since the end of October. Most of these securities have one characteristic in common, and that is to exhibit low valuation levels, well below historical averages.