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2024 Outlook

2024 Outlook: Unwinding Mixed Signals in the Financial Markets

Rob Costello: Hello. Good morning to some. Good afternoon to others. My name is Rob Costello, and I’m a client portfolio manager here at Thornburg Investment Management, broadcasting live from our headquarters in Santa Fe, New Mexico. I want to welcome all of you attending this 2024 Outlook webinar, both here in the United States and across the globe. In this webinar, we’ll discuss topics ranging from the outlook on the macro picture, what to expect from the equity market this year, the outlook for Federal Reserve policy and what this means for equity, fixed income and multi asset investing for the coming year.

I’m pleased to be joined by my colleagues Ben Kirby and Jeff Klinghoffer, who are co-heads of investments here at Thornburg. Ben and Jeff, nice to have you. So, a couple of housekeeping items before we get started. To ask a question within the webcast is going to be two ways that you could do so. The first is to send an email to questions at Thornburg dot com.

That’s questions at Thornburg dot com. The second and probably the more convenient way is to type in a question directly into the webcast. We’ll take audience Q&A later in the session. But in the meantime, then, Jeff, let’s get right into it. In many ways, investors enter 2024 with much the same debate as how we entered 2023, which is will the economy into recession or are we navigating or successfully navigating a soft landing and the data has been mixed.

For example, the US labor market has been fairly resilient. There was a stronger than expected non-farm payroll number late last week. The US unemployment rate is still steady at 3.7%. On the other hand, there’s data that’s showing the opposite. For example, the consumer, which while broadly employed, has been seeing pressure on the balance sheet. For example, credit card delinquencies have been rising pretty consistently across eight age cohorts. So, my question is to both of you, and I’ll start with you, Jeff, but what are your thoughts about what the trajectory of growth will be in 2024?

Jeff Klingelhofer: Yeah, I think you really set the question of well, in the sense that confusion is maybe the word that comes to mind. I would point to, yes, GDP has been strong, but not just production within the US from GDP. But when you look at gross domestic income, for instance, we’ve been trending roughly flat for the last 12 months.

Nonfarm payrolls, as you point out, was surprisingly resilient. But when you look at the household survey, again, we’re trending roughly flat. So even within many of these data points, you can kind of focus on the positive, you can focus on the negative. And it leaves all of us to tell our own story. I think to me, what I would suggest is higher rates are having an impact.

The economy is slowing. And what didn’t happen in 2023 is we didn’t roll from just a slowing economy into an outright contracting economy. And the big question is, in 2024, will we? From my perspective, I still worry about that a lot. It’s certainly not a foregone conclusion that we’ll roll over into an outright recession. But I do think that continued high rates, along with a Fed that is much more reluctant to cut as aggressively as the market is expecting is likely to continue to see us on that downward trajectory. And we have a left tail, a recessionary tail risk as the big challenge for 2024.

Rob Costello: Ben, what’s your take?

Ben Kirby: Look, I think Jeff and I are pretty aligned on this. I think the base case is that growth should continue to slow in 2024 because of the lagged effects of monetary policy. There’s a lot of tightening in the system that takes a while to work through. That said, glass half full is also a reasonable perspective to take. Inflation has come down a year ago from 4.9% to 3.2% today on the on the core PCE. So it seems like growth continues to be positive even as inflation has come down. That’s some of the components of a soft landing. Will we get or not? Not entirely sure, but slower growth this year. But very possibly still positive.

Rob Costello: So, Ben, something a little bit more optimistic than Jeff, but Jeff is a Bond guy, so I can understand that. But, Ben, let’s turn to the backdrop for equities this year. Despite the concerns entering last year, 2023 was a very surprisingly positive market for equities overall. And consensus estimates for this year kind of point to a resiliency for earnings growth.

The estimate is for about a 12% year over year EPS growth among the S&P 500. So what is your level of optimism? Can momentum continue or should investors expect a mean reversion after last year’s strong returns?

Ben Kirby: Yeah. So 12% earnings growth is a bit aspirational. I would say that’s going to be a little bit difficult to achieve. What’s interesting is almost every year sell side analysts predict 10% growth for the next for the next year’s earnings as that’s coming as a starting place. But over the last 20 years, 30 years, ten years, any of those time periods, actual earnings growth on the S&P has been about six and a half percent.

So again, we start the year at ten and then we end up at about six and a half. So if you kind of add six and a half percent expected long term earnings growth to the current dividend yields of one and a half percent, it gets you to 8%. And then the last part is that speculative return. So that’s the multiple the change in the multiple.

Last year, the multiple went up and now on trailing earnings, we’re at 23 times for the S&P, which is above the long-term average of sort of, you know, 19 or 20 times. So over the next some period of time, one, three, five, ten years, I think you would expect that multiple to compress somewhat. So just sort of overall level setting expectations, I think a return of less than 8% is likely for the market over the coming several years.

Rob Costello: And Jeff, let’s pivot to the Federal Reserve and what kind of policy to expect out of them in the coming year. The Fed delivered an unexpectedly dovish message, I suppose, in mid-December, and their dot plot now shows three cuts forecast for 2024. And this is versus the two cuts that they were previously communicating in the prior meeting. And the markets were very happy with this.

There was a risk on rally rates fell, equity markets rose. My question would be, are we seeing a real change in in the Fed in coming into this year or have the market simply got ahead of itself? And we’re still really grappling with a Fed that is still in full inflation fighting mode?

Jeff Klingelhofer: I think it’s a little bit of both. I think the challenge here to remind ourselves is the Fed is also reacting to incoming data. And part of that incoming data is market data, right? It is financial conditions. And so if we rewind the clock to that more dovish pivot, financial conditions were incredibly tight, right? That was when mortgages were at eight and a half, 9%.

That was when the ten year Treasury was close to five. And so on the back of that, I think that was I’m going to call it a freak out moment from the Fed, right? It was them looking at conditions saying, gosh, we haven’t tightened this much, but the market has really stepped into that tightening for us. We need to ratchet them back.

Today, we have the exact opposite, right? Markets have rallied, rates have come down. And if anything, I think we’re seeing a volatile Fed trying to react to the very fast changes. Now, directly to your question, I do not think that the Federal Reserve has pivoted from anything away from in a pure inflationary fighting mode. Inflation is still well above target.

I think that they continue. We talked about this in many quarters previous, that they’re still willing to tolerate higher inflation, but it has to continue moving towards a 2% target and it has to be at highest anchored at roughly three. Ben already mentioned, right, we’re at 3.2 today. Tomorrow’s an important number, but nothing that I have seen suggests that they’re pivoting.

I think the market is far ahead of itself in price in the five and a half Fed cuts. Right. Over the last 150 years of economic history we’ve seen 12 times where the Fed has cut by five or more times. 11 of those were in recessionary time periods. History doesn’t always have to repeat, but I think it gives me caution that without a recession, I think we’re likely to see maybe one or two Fed cuts, not the five that are priced for markets.

Rob Costello: And that’s very interesting. Staying on the subject of zero rates, I think it could be we could say with some certainty, maybe not full certainty that the era of zero rates is officially over or at least near-zero rates. What do you think the implications are for a normalized cost of capital for equities? What segments of the market do you think are positioned well for this this change in the landscape?

Ben Kirby: Yeah. So zero rates or near zero rates for 15 years, that was really a very accommodative policy, emergency type policy that probably outlived its usefulness, that produced a lot of distortions in the markets. So businesses that were maybe able to fund themselves through debt or equity capital issuance, maybe they had a business model that was losing money, but they were able to keep the business going through, accessing the capital markets at very low cost.

Maybe those businesses don’t work as well in a higher cost of capital environment. So I think the implications are there’s fewer IPOs, there’s fewer small startup companies who are able to really fund that growth for a sustained period of time. So that tends to probably reduce the level of competitive intensity in most industries and also reduce the level of innovation that we’re likely to see.

That tends to favor the larger, more dominant incumbent companies who have a lot of cash generation from their core business. They can pay dividends, they can buy back shares, they can acquire smaller companies. So it really does change the competitive landscape, we think, from those private startup companies. And now it’s favoring a lot of the larger incumbent companies that pay dividends.

The last part would be some of the role of businesses or businesses that just had very low return on investment. They were able to still make that business model work by leveraging it. And now the cost of leverage is so high, the spread is lower. So a lot of those businesses are also going to be challenged. So that argues for companies with higher returns on invested capital and companies with lower debt positions are also going to be better positioned in the next few years.

 

Rob Costello: And Jeff, there seems to be in 2023, or in 2023 there was a focus, an increased focus on the health of the government balance sheet. We’ve seen these questions from investors as very reasonable. We’ve seen it in the financial press as well, about the ability of the U.S. government to handle its debt. There’s been a notable increase in net interest costs over the past couple of years, and that’s coincided, not surprisingly, with the Fed hiking cycle, with the rise in interest rates.

We see some sensitivity there. So what would you say to investors that are concerned about the government balance sheet?

Jeff Klingelhofer: Sure. I chuckle when you talk about the health of government balance sheets, I think it’s not just a US question. It really is a global question. And so as we focus on balance sheets more broadly, they are simply late to the party. Corporations have pulled back some of their spending, consumers have pulled back some of their spending, and governments have expanded much of their spending.

And nowhere across the world is that more true than here in the U.S.. So I think it gets back to a little bit that first question of what do we expect in 2024 if the government continues to expand its balance sheet? It’s tough to see how a recession. But at some point the day of reckoning will come for the government, just as it has come for consumers which are slowing and corporations which are slowing.

And so I don’t worry about a debt crisis in the US. I think the US government still continues to have incredible taxing authority. It’s a very strong it’s a dynamic economy, but there are realities to the bond vigilantes and there are realities that when you come with this much supply, all things else equal, it’s reasonable to expect that rates continue to tick up.

And so as I look forward, I think the election cycle is really what I would watch very closely. I think this election cycle will feature much more prominently than previous ones. A focus on the sustainability of debt. But I think especially when the new president gets in the seat, whoever that ends up in 2025, that is going to be front and center for that new cabinet to take up.

Rob Costello: Yeah, no, that’s very interesting, Jeff. And we we’re going to take a break from the regular Q&A here and have a little fun. And we’re going to do what we call a lightning round. So I hope you guys are ready for it. What I’m going to do is give you guys a bunch of questions on various market topics.

It’ll be rapid fire and try to come back with some rapid fire answers back. Maybe one one or two words is all we need here. Some of these may be crystal ball like questions. We don’t have a crystal ball here in front of us, so we’ll make the best of it. And let’s see where we go from here.

You guys ready to go?

Ben Kirby: You bet.

Rob Costello: All right. So first question, what will the level of the S&P 500 be by the end of 2024?

Ben Kirby: 5100.

Jeff Klingelhofer: 4700.

Rob Costello: All right. Again, Ben being a little bit more optimistic there. So make sense. Very consistent. Price of oil?

Ben Kirby: 80.

Jeff Klingelhofer: 72.

Rob Costello: All right. The ten-year U.S. Treasury yield by the end of 2024?

Ben Kirby: Four, even.

Rob Costello: Okay. The euro US dollar currency cross.

Jeff Klingelhofer: 112.

Ben Kirby: 120.

Rob Costello: Okay. Which outperforms emerging market equities or U.S. equities in 2024?

Ben Kirby: EM equities.

Jeff Klingelhofer: Agree with that.

Rob Costello: Okay. And growth or value in 2024?

Jeff Klingelhofer: Growth.

Ben Kirby: Surprising. Value.

Rob Costello: All right. And which NFL team will win the Super Bowl in early February in Las Vegas?

Ben Kirby: How about them Cowboys!

Jeff Klingelhofer: I’m going to say Detroit.

Rob Costello: Okay. So, well, that’s the NFC. We read between different questions here. We’ll continue on with the questions and stuff. We want to get opinions on both for both of you on this. Jeffrey spoke to this a little bit. And let’s unpack this a little bit more because this is, as you mentioned, election year in the U.S. but it’s also an election year for many countries globally.

You know, we’re reading that recently at think 60 countries or so have either a presidential legislative parliamentary election in 2024 apparently represents, you know, more than half of the world’s population that will actually be impacted by this. So share with us your thoughts on, you know, what, if any, politics in elections will have an asset markets in 2024.

Ben Kirby: So I think in the U.S., it’s not a first order consideration, which I know is maybe not consensus, but I think the two parties have different social agendas, but they actually have fairly similar economic agendas. Right. Both parties are willing to run big deficits. They both have similar views on health care. They both wanna be tough on China.

So to me, it maybe doesn’t matter as much for the financial markets. Both parties are increasingly populist in a lot of their policies, so I’m not sure it’s going to have a huge impact on markets unless it’s not the two candidates we expect sort of competing with each other and in that case, the possible change agent, it sort of, you know, less expected candidate.

I think that could cause some uncertainty, assuming it’s the two we expect. I’m not sure that either one is going to make a huge difference.

Jeff Klingelhofer: Yeah, it’s a little different stance. I mean, I, I think what I see is there’s a fundamental step change happening in the global economy, right from one where we are excite it about globalization to one we’re a bit more hesitant. There’s a fundamental step change happening in the world of interest rates. And just what I’ve turn to the end of low interest rate alchemy and on the back of high inflation, I think it’s no longer politics driving the social agenda.

I actually think it’s people driving politics, which maybe sounds a little interesting given a Democratic society. But I think just people’s wants and desires are shifting. And so I think that all of this may come to clash, not necessarily in the actual election cycle, but it was certainly in the years that follow. You know, having touched on the real debate around the sustainability of the US debt load.

But I also think just along with politics, geopolitics is likely or there’s a very increased tail risk to geopolitics playing a big part of the 2024 story. And no time does that become more evident. I think when there are election cycles going around the world.

Rob Costello: And let’s hit on equity valuations again or the equity market, the 12 month or PE on the S&P. You know, as you mentioned, 23 times currently at the beginning of 2023 was 17 times. Many non-U.S. markets didn’t see that type of performance and are significantly less expensive, both on absolute terms relative to history. As a global investor, how are you thinking about relative value across regions?

Ben Kirby: Yeah. So just to clarify, 23 is trailing. So, you know, forward is closer to 20. That obviously bakes in some pretty exciting earnings growth in the next year to get that multiple down to, you know still an above average level. So look, the S&P is expensive versus history. It’s also expensive versus markets internationally. So Europe is trading at a 33% discount to the US and even on a sector neutral basis because of course Europe doesn’t have Microsoft and Apple and Nvidia.

So on a sector neutral basis, European stocks are still 17% discount. So in one case, 33% is the highest discount ever and the other case, 17% is one of the highest discounts ever. So that valuation looks attractive. Japan is about 14 times earnings. Emerging markets are about 12 times earnings. China’s nine times and Brazil is eight times. Compare that to a US market that’s about 20.

So the valuation discrepancy has really increased in the past few years and it continue to increase last year. So to us that at least sets up an interesting backdrop for international diversification in client portfolios. Maybe the last piece I would add is currencies also look interesting. So the US dollar on a purchasing power parity basis looks relatively expensive.

This is probably a great time to go on vacation to Japan or to go on vacation to Europe or to go on vacation to Brazil. If you get the combination of attractive equity prices and also an attractive currency, that could be a powerful, a powerful combination. Maybe the last thing to point out is the US equity risk premium.

If we look at the US interest rates relative to the earnings yield on the US market, that spread has compressed. That spread represents the amount of additional return you’re expecting from equities versus bonds. That spreads about 1% today. If you go to Europe, that spreads about 6%. So European bonds don’t look so great. European stocks, we think, look very attractive.

Rob Costello: It seems like some of that reasoning is coming through on the euro / U.S., the 120 that you mentioned earlier. So that makes sense. Jeff, let’s segway back to fixed income. Now for folks attending the webinar, in our written fixed income outlook on our website, we declare 2024 to be the year of the bonds. Now, of course, we love our multi-asset and equity strategies, but in all seriousness, investors have loved cash instruments over the last couple of years and for very good reason. Right.

The yield has been there, whether it’s Treasury bills, whether it’s money markets. We’ve seen money market assets rise to record levels, even in the fourth quarter, money market assets increased. And this was against a backdrop where fixed income had a quarterly return that was really the best that we have seen in a number of years. So simply put, Jeff, in 2024, is it fixed income and not cash that’s going to be king?

Jeff Klingelhofer: I think it’s back to one of the earlier questions around what do we expect from the Fed? Right. Cash is cash. The beauty of cash is I can tell you, I know exactly what cash is going to do this year. It’s going to be cash. The challenge with cash is it’s not a negatively correlated asset class. And that is the hope as we look to 2024, if we do see a slowdown of any sort, that it is negatively correlated and outright overall return prospects have increased notably in a world of higher interest rates.

So I think what we should expect in 2024 is a lot of that cash coming off the sidelines. What happened in 2023? Investors who were in cash missed out. And so I think there is a little bit of that FOMO, if you will, that they have to get off the sidelines. And the question is, what do they come in to? The taxable fixed income market, the municipal market, the equity markets? And I think it’s honestly a little bit of both.

I think cash was all of a sudden in vogue because of those higher rates. But the starting place for fixed income more broadly is also very much in vogue. I think today is one of the best entry points really that we’ve seen in a very long time period for high quality, fixed income.

I’m much more skeptical at this point of moving into the world of more credit like fixed income, but for high quality portfolios, we really do think that there’s still significant opportunity for some multisector portfolios, there’s a lot of opportunity. I’d be cautious on stepping too far out the right of the risk spectrum within fixed income in particular.

Rob Costello: That’s insightful Jeff and I thank you guys so far for your insights. We’re going to move to the Q&A session. And just as a reminder for the audience, there’s two ways to ask a question. The first is send an email to questions at Thornburg dot com. Again, questions at Thornburg dot com or typing the question directly into the webcast. As we have questions come in, just a question that I wanted to tee up for you guys, which is in terms of the small cap or the smaller cap equity markets. Which, in 2023 lagged the S&P. What is your outlook on small caps this year and do you think they’ll outperform?

Jeff Klingelhofer: I think Ben talks a lot about valuations and the starting place of valuations matter a lot. And what we’ve seen is a significant discount of small caps already. The big question for 2024 is will we see that slowdown? And again, no one has the crystal ball, but to me, really the tail risk of 2024 is that we see that recession.

If we see it, small caps generally feel it in a much more significant way. Large caps have a much broader moat, the ability to protect their business. A lot of times our ability to protect higher return on investment, but they’re already priced for that. And so I think the starting place for small caps today looks very interesting from a from a valuation perspective, especially in the US, where large caps are already perhaps a little bit in front of themselves.

Ben Kirby: I’ll add on to that. Look, I think small cap valuations look really attractive. We’ve had a significant D rating. What’s most worrying about the large cap market is to understand there’s a possibility of a soft landing, There’s a possibility of a hard landing. And we don’t know exactly what that distribution is, but the market is mostly pricing in a soft landing.

So if you get a soft landing, maybe you don’t get a lot of excess return and and then there’s a left tail on the hard landing side. I think small caps have already moved to price in much more of the hard landing scenario. Two other points is I think that in this higher cost of capital world, a lot of smaller cap companies that were able to run losses in order to grow really quickly are trying to find ways to profitability.

And that’s a two year old story now. So I think there’s been a lot of cost cutting and I think that the small cap index, small and mid-cap index is now higher quality than it was a couple of years ago. You could buy companies that have profits. And then maybe the last part is the small cap universe is less efficient than the large cap universe.

So I think that active management in particular can really play a place in generating outperformance, selecting those exceptional small cap companies that are going to become large cap companies over time.

Rob Costello: And one other question I wanted to pose, which is and something that we haven’t covered yet, which is the municipal bond market. And of course, munis are affected by a lot of the factors that we have been discussing in terms of in terms of rates in the Fed. We are prolific muni investors. We’ve had a long standing platform here at Thornburg.

What is our view on Munis now and going forward?

Ben Kirby: Yeah, I’ll start us off. Thornburg has a very successful muni franchise and we actually started off as a muni shop and continue to have great, great strategies for our clients against the backdrop that Jeff described of increasing government debt as far as the eye can see. So the government deficit continuing to rise, That really is interesting from the perspective of a tax free investor.

If those tax rates need to go higher over time to help to bring that deficit down, then being positioned in a muni portfolio is a way to protect yourself and hedge. And I think that especially for the higher quality that you get in the muni market on a tax adjusted basis yields actually look quite attractive.

Rob Costello: Jeff, anything that.

Jeff Klingelhofer: Yeah, just to add on to it a little bit, but I think again it goes to valuations and the starting place really matters. And what we’ve seen is a huge rally, especially on the front end of the curve, which gets a little bit of that cash question, right? The ability to have an interesting income stream will not having volatility to either credit or rates was very interesting.

It has been fully pricing muni market but we’re still seeing a lot of opportunity is really on the lower end of the curve where some of those valuations those spreads, if you will, remain a little bit wider on a tax adjusted basis versus taxable fixed income. And then I think even going into the election cycle as we look forward, a risk to the government deficits is that taxes will go up.

And so as that begins to price in, we continue to think that munis are our place to be and take advantage of some of the higher rates, especially in the longer duration side of the equation.

Rob Costello: I have a question that came in regarding equities, and it is international stocks have traded at a big PE discount for more than a decade. What do you think is the catalyst to drive a PE expansion?

Speaker 2: It’s a good question. Definitely the right question. I think there’s a virtuous circle and a vicious circle. So in in a in a zero interest rate world that favored the US market for a few reasons and in a higher interest rate world, I think it can favor international assets. On the virtuous circle side, higher dividend yields is a source of a component of return for international investors.

If you combine that with a bit of currency appreciation and you combine that with low equity valuations and similar earnings growth, then I think you’re going to start to put those four pieces together. And that’s sort of what drives the rerating as well. Right. So we talked about the three components of equity returns for international stocks. There’s a fourth component, which is that currency piece.

I just think there is the possibility for international to start outperforming. And then domestic investors realize that, you know, there are 70%, 80% US allocation and maybe they should be 60%, 50%. And so then that drives capital flows in international markets and you get a virtuous circle. We’ve seen it happen in the past. It tends to happen when the U.S. comes off an exceptionally strong period, especially in the 2000 period.

So I think we could be entering kind of a 2002 to 2007 period for international stocks.

Rob Costello: I’ve got a question regarding the Fed and short-term securities. So 19 trillion is in short term securities based on Fed data. It’s about 37% of the total equity market cap. Do you think this liquidity can push markets higher than consensus expectations? Actually, it’s an equity question. Excuse me.

Jeff Klingelhofer: I’ll take first stab in a couple of ways. And I think part of what is at the heart of this question, or at least my belief at the heart of this question is the balance sheet of the Federal Reserve didn’t adjust nearly as much as balance sheets across much of the rest of the world. Consumers termed out their debt via long term financing of houses.

Corporations termed out their debt. The government balance sheet didn’t. A lot of the QE, a lot of issuance focused on bills. And even as we look forward, it’s the same thing, which means their debt costs are rising at a higher pace than most of the rest of the economy.

There’s been a lot of questions around what effect that has, but one of the key things in 2024 will be, not only the face of a lot of Treasury issuance, but also if the Federal Reserve’s choose to wind down or at least slow their quantitative tightening programs. I continue to believe that the Federal Reserve hasn’t made as much pivot as nearly as much of a pivot as the market is expecting, and that so long as we don’t enter a deep recession, which is not what markets are pricing, I’m a little more cautious, but certainly not what markets are pricing. I don’t see why the Federal Reserve doesn’t want to continue the wind down of its balance sheet.

I think all of that supply, I think it’s a headwind to equity prices, quite frankly. But 2023 is a surprise. We’ve managed to handle it. But again, a lot of these things happen with a long lag. So I think it’s a headwind to equity valuations as we look forward.

Rob Costello:  And it is an election year as we’ve talked about. So the question we got in, how impacted is the Fed by politics?

Ben Kirby: So I’ll start I know we should officially say not impacted. And I think Jeff will we’ll say not impacted. That said, there’s the Fed and then there’s the and then there’s a fiscal authority. And so the fiscal authority is controlled by the incumbent party. And incumbent party wants to keep spending going. So the things feel as good as they possibly can as we go into to the election cycle.

So even if the Fed is relatively independent, there’s still a significant fiscal impulse that can happen in an election year and that may overwhelm what the Fed does.

Jeff Klingelhofer: I would agree. I mean, I think it’s important to separate the Fed versus the fiscal side. I would say data is not your friend when you believe that the Federal Reserve is on hold during an election cycle. It’s more often than not when you look across history that they either raise rates or cut rates and they don’t have a bias, at least, again, looking towards pure history, one way or the other, I will defend the Fed.

Not that they’ve made a lot of the right moves, but I think they have been data dependent and I think that they’ve done a very good job of really telling us what they’re expectations are. But the market’s done a poor job is reading into those expectations. So I continue to think that they will be relatively unbiased. Reality is, is it currently inflation is coming down and currently growth is okay.

That would support a minor pivot of the Fed, but not nearly as an aggressive one as the markets are currently proceeding.

Rob Costello: And we’ll do one more question to put out there and this is back to equities. So among international, ex-U.S. equity, how do you see emerging markets performing compared to developed markets?

Ben Kirby: I’ll take that one first. I think international and/or emerging markets are going to outperform most asset classes over the next decade. And there’s a high degree of skepticism and bearishness on emerging markets, especially on China. I would just say less caution. Let’s have caution and not write China off too quickly. It remains a very important, powerful country with a lot of levers to pull and actually a tremendously innovative country from a business standpoint.

So, you know, I think that for emerging markets in the past, in fed hiking cycles, something broke, right? Whether it was Argentina or it was Turkey or it was the Asian financial crisis or it was the tequila crisis something or the Russian financial crisis, Long-Term Capital Management. There was always some emerging market that broke the weak link, broke when the Fed started hiking rates, and this time that didn’t happen.

So emerging markets are exiting the Fed hike cycle in better fiscal position than they have been and better monetary policy position it than they ever have been. And the secular story for emerging markets of a rising middle class of innovative companies with lower cost remains. So I’m very bullish on emerging markets for the medium term.

Rob Costello: And we have actually I said I mentioned one more question, but we have one more question coming in. So I just want to make sure we get them in, as many as we can. This is actually in the commercial mortgage space. And the question is, is has just too much bad news been priced into the commercial mortgage market?

Jeff Klingelhofer: Certainly a lot of bad news was priced in. I would say we’ve seen a tremendous rally here in the space, I think, for exactly the reason why this question is being asked. You know, today, the reality is the CRB market is a slow moving market. Because the average lease term is ten years. And so one of the most important differences is to recognize that lease percentage is very different than occupancy percentage, where the average building today is only 50% occupied, but it’s still 85 plus percent leased.

It’s a long tail until that lease rate converges with occupancy and a lot will happen, right? Most companies around the world, and certainly in the US, are asking workers to come back to the office. We did have a glut of supply, and especially in some key markets like New York City with Hudson Yards and some other massive projects that came online.

But there are opportunities I think is the best way. I do think that there are also will be a lot of losers left behind and it would be very different, differentiated by market and even within submarkets. So I’d say tread carefully, but there are absolutely opportunities and we’re seeing some and taking advantage of some of them within our portfolios.

I’d say higher quality, very class A in desirable areas, type properties.

Rob Costello: All right, we are going to bring this webcast to a close. I want to thank you so much, Ben and Jeff, for your insights today and for folks that want to read more about our insights, we please go to our website Thornburg dot com slash outlook. We have our outlook on the various areas of the market and you will see that Ben and Jeff are the authors on those outlooks. We definitely encourage that. And again, thank you to everyone on the webcast. I hope you enjoyed it as much as I did.

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From continuing supply chain realignment to the emergent consumer and more, these factors align for underappreciated and mispriced emerging markets in 2024.

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If net zero carbon emissions remains the long-term climate goal, high interest rates require discipline deciding which projects are financed and which are not.

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