Investment Strategy: International Markets

In late January, the Fed held its latest meeting, and Chairman Jerome Powell stated that interest rate cuts would likely not begin at the March meeting, which had been the market consensus until then. This led various financial markets (including interest rates, stocks, and currencies) to adjust, as market prices had previously incorporated a high probability of rate cuts starting in March.

We agree with experts who believe that global inflation will continue to decline, especially in developed countries, in the first half of the year. We even expect it to reach around 2% in the U.S. this year, and possibly slightly lower depending on the inflation measure used. However, we note that many experts and economists anticipate that U.S. inflation will continue to decline more rapidly over the next 12 months simply by annualizing recent data, but recent trends do not always persist over a longer horizon. While U.S. inflation is expected to continue falling enough to allow the Federal Reserve to reduce interest rates in mid-year, we still see inflationary pressures in the labor market and a slow economic slowdown. With greater persistence of U.S. inflation, we believe there is potential for the first rate cut to be postponed beyond June, although we acknowledge that pinpointing the exact timing is challenging.

U.S., European, and Japanese stock markets rose in January, but U.S. stocks slowed at the end of the month due to the Fed's comments. The European Central Bank and the Bank of Japan reaffirmed the importance of short-term data in determining their interest rate decisions. In Europe, December data confirmed the medium-term outlook and indicated that inflation remains above the target, meaning interest rates are likely to stay at current levels for a "sufficiently" long period. However, more recent data have highlighted a slowdown or even recession in significant parts of the developed world, clearly excluding the U.S.

In January, China announced a series of measures to stimulate the economy and markets, including a stabilization fund to invest in falling stocks and a cut in bank reserve requirements, signaling a political willingness to boost the economy through credit expansion. Despite this, it is difficult to determine if China will be able to maintain growth around 5% per year as official data suggest, with many market participants suspecting that the real growth might be lower than reported, especially post-pandemic. Additionally, there is no coordinated support for the real estate sector, which continues to contract, and Western analysts, even from major research firms and global banks, acknowledge their limited ability to predict whether we are witnessing the start of a process of adjustments that could even lead to a recession in China. This is in the context of discussions about whether a recession would be felt with growth rates of 2-3%, rather than just negative GDP as in the rest of the world, given the still immense importance of the external sector in the Chinese economy and the difficulty in measuring the real impact of recent labor market changes (such as internal migration and local government reporting exaggerations). As a result, global investors remain quite cautious about the economic and geopolitical risks stemming from China.

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