‘Steady’ rate cuts expected as opposed to ‘rapid’ cutting cycle in 2024
Michael Grady
Aviva Investors, the global asset manager of Aviva PLC (‘Aviva’), expects a steady process of rate cuts from the world’s major central banks this year as global growth remains stronger and inflation somewhat more persistent than expected, according to the firm’s latest quarterly House View.
The asset manager predicts that global growth will be around 3 per cent across 2024. Whilst this is still down from 3.25 per cent in 2023, this is an upwardly revised estimated from the 2.75 per cent that was predicted at the start of the year. This is the result of Q1 2024 seeing growth momentum maintained or moderately improved across most regions. For the United States that has resulted in a better-than-expected start to the year, with consensus growth forecasts revised up for the year as whole.
In the Eurozone, growth is expected to return in Q1 following a year of stagnation. With the effects of higher energy prices fading, an historically low unemployment rate for the region and elevated household saving, there is scope for consumer spending to improve. Similarly, in the United Kingdom a return to growth in Q1 is anticipated, albeit with a slower rate of improvement this year, with ongoing headwinds from higher mortgage costs. In Asia, the growth outlook remains positive in Japan, although 2024 is expected to be slower than 2023 due to the boost from Covid re-opening earlier last year.
As a result of the growth outlook, while rate cuts are indeed coming into focus, the pace is likely to be steady, rather than rapid. Since the start of the year the market has pushed back the likely timing of the first rate cut and seen the terminal rate of the cycle revised higher. Aviva Investors agrees with that direction of travel for the US and believes there could be a further move that way. However, pricing for the UK has been dragged along with the US, when in fact the economic backdrop looks quite different. As a result, the Bank of England could cut rates sooner and more deeply than is currently priced.
The ECB has been fairly clear that it expects a first rate cut to materialise in June, with the pace of cuts likely to be at a quarterly frequency thereafter. It is expected that the recent policy shift from the Bank of Japan will end yield-curve control (YCC) and raise the policy rate into positive territory, but further rate hikes are likely to come slowly.
Regarding asset allocation, the impending rate cuts, alongside robust corporate earnings, should result in a supportive environment for risk assets. As such, Aviva Investors continues to be overweight equities, with a relative preference for the US and Japan over Emerging Markets. Returns have been strong this so far year, and whilst this was expected, it seems unlikely there will be a similar pace of equity market returns for the remainder of the year.
However, the team do note that the risk of market ebullience breeding instability is growing. Therefore, the team also prefer to be overweight government bonds to give balance to the asset allocation in the event of a risk event materialising. A more elevated yield environment also makes for a more attractive risk/reward dynamic as we enter a cutting cycle. The preferred markets to be overweight are the UK and the Eurozone, with an underweight in Japan. The team also continue to prefer to be broadly neutral on corporate bonds, with the risk/reward somewhat better in high-yield than investment-grade given the stage of the cycle.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said: “The start of 2024 has been stronger for markets than initially predicted, particularly in the US, with consensus growth forecasts moving upwards, and the expectation of a return to growth in o the UK and Europe over Q1.
“Rate cuts are certainly on the horizon, and at this time it seems like the ECB will be the first to move, potentially as early as June. However, the Bank of England has the potential to surprise markets by cutting rates earlier and more deeply than what is currently being priced.
“As a result, we expect risk assets to be in focus over the coming months. Whilst global growth figures may well end up being below the levels of 2023, the stronger than expected start to year, twinned with an impending cutting cycle could present a positive backdrop over equity markets over the remainder of 2024.
