Based on Quintet’s base case scenario, in 2024, global economic growth will slow further before a shallow recovery in the second half of the year, when, given inflation deceleration, central banks will begin cutting rates.
“As economic growth really gets to a point where it is below the typical pace [that] we have seen in the decade prior to the pandemic,” said Daniele Antonucci, co-head of investment and chief investment officer at Quintet Private Bank, a Luxembourg-headquartered European wealth manager operating in 50 European cities. “In parts of the world, we’ve hit a mildly recessionary environment. That’s the eurozone, we are in a mild recession right now.”
Antonucci explained that inflation is expected to slow, though remain above the central banks’ 2% target. With the slowdown in growth and inflation, interest rate cuts are anticipated from mid-2024.
He added, “I’ll give you the US example, which is the starkest example, when inflation is 10%, you keep interest rates at five and a half [percent]. If inflation is 3%, you don’t need to keep interest rates that high, you simply accommodate for the fact that inflation has slowed, even though it’s above target. You will get a general recovery. It’s time to gather pace. And interest rates go down by something like 100 basis points, give or take or one percentage point [1%], depending on the region.”
Volatility and a more fragmented world
“So, while we try not to do everything the same everywhere, especially we’re ‘reading’ the portfolio. We try to have exposure to different geographies, different asset classes, different themes, precisely to capture the notion that the world is a complex place. There are many trends, some are more economic in nature or to do with the corporate sector and market, some are not but you want to keep a long term diversified portfolio. I think that is a better way as opposed to making calls or specific events that sometimes have lasting power, but at times can reverse very quickly and swiftly,” Antonucci stated during an interview with Delano in December.
Diversified asset allocation
Quintet’s 2024 forecast underlined the bank’s investment strategy, focusing on four exposures that can offer defensive benefits. The strategy includes four insights of asset allocation aimed at minimising risks within the investment portfolio.
Antonucci noted the first insight by saying, “if our base case plays out, and we have a stabilisation in interest rates [followed] by a decline, we should take away the [interest rate] headwind. And so, we maintain our defensive bias, we own less equities than our typical long term asset allocation. But we have moderated this bias. So, we started to add into equities, while keeping what we will call an underweight to a lesser exposure than normal.”
Quintet is slightly increasing exposure to European equities, buying Asia-Pacific ex-Japan equities.
On the second insight, Antonucci said: “When we look at bonds, we like high quality bonds, these are typically government bonds. There are other types of quality bonds, and we have increased our exposure to quality bonds. Because we are at the peak in interest rates within the bond yields. They’ll move sideways for some time, eventually, will come down, they’ve already started to come down if you think about it. And so, we want to lock in these yields, while they remain fairly attractive.”
Quintet is keeping current exposure on longer dated, high quality government bonds in the Eurozone. based on the reality of peaking interest rates, followed with a fall in the second half of the next year.
Reducing riskier credit and diversification is the third investment insight underlined by Quintet. Antonucci said: “We started to add exposure to particular equity markets, because they’re more fairly valued. When you look at our valuation matrix, the US shows demanding valuations, Europe is more like average valuations. But also, we started to add exposure to markets that offer diversification. For example, [Asia-]Pacific ex-Japan equities are developed equities, [focusing on] Australia or New Zealand, Singapore, [which represent] developed markets in the region, [offering] high quality exposure to defend [against the current] divergent trends. [The world] is no longer a US centric world, we have more multipolar trends, right? So, you want to have exposure to different parts of the other more fragmented global economy.”
Quintet’s fourth insight aims to hedge against uncertainty, and to reduce inflation pressure. Antonucci noted that “we reduced our exposure to gold [which currently appears overvalued]. And we added a long-term commodity exposure that captures trends like metals needed for the technological transition, or for the energy transition as well. So, we added two commodities.”