2024 Outlook: Unwinding Mixed Signals in the Financial Markets

2024 Outlook: Unwinding Mixed Signals in the Financial Markets

Rob Costello:  Hello and Good Morning. My name is Rob Costello and I am a Client Portfolio Manager here at Thornburg Investment Management, broadcasting live from Santa Fe, New Mexico where it is early evening here in the United States. I want to welcome all of those who are attending this 2024 Outlook Webcast in the Asia region.

In this webcast, we will discuss topics ranging from US and global growth, central bank action to tackle inflation and a range of other global topics that we hope will bring some clarity to how you approach fixed income and equity investing this coming year.

Today I am delighted to be joined by my colleagues Jeff Klingelhofer and Brian Burrell who are managing directors on Thornburg’s investment team. Jeff and Brian, it’s nice to have you both here.

A couple of housekeeping items before we get started: First, there are going to be two ways to ask a question on this webcast. The first is to send an email to questions@thornburg.com, that’s questions@thornburg.com  and the second, which is probably the more convenient way, is to type a question directly into the webcast. We’ll take audience Q and A a bit later on in the session here.

I thought we’d start off, Jeff, with you providing an overview of Thornburg to the folks on the webcast, particularly for those who may not have as much familiarity with Thornburg. So could you provide us with a brief overview?

Jeff Kingelhofer: Sure. Thornburg was founded in 1982. Our headquarters are here in Santa Fe, New Mexico and for the last 42 years we have been serving institutions, individuals, endowments and foundations globally. Every single team here at Thornburg operates with a similar philosophy that by looking across silos that allows us to break down some of that analysis to find the best relative value and the best risk and return. We really do believe that the markets are inefficient because of the way many of our competitors operate in a very siloed fashion. We offer products across the range of typical investment products. We

have a very strong domestic and international equity franchise, a very strong taxable fixed income franchise, a very strong municipals franchise as well as a multi-asset franchise. Thornburg has been serving clients for a long time and we really do focus on great risk-adjusted return and I think that’s it, so I will turn it back over to you.

Rob Costello: Yeah, absolutely. And let’s focus the discussion now on the markets. In many ways investors enter 2024 with much the same debate as we entered 2023. That is, does the economy enter a recession or are we navigating, are we successfully navigating, a soft landing? And the data is conflicting. On one hand, the US labor market has been resilient. There was a non-farm payroll number that was stronger than expected late last week. The US unemployment rate is at 3.7 percent which is obviously very low and quite steady. However, other data does show gradual weakness. The US consumer, for example, has been showing some weakness on its balance sheet as evidenced by credit card delinquencies on the rise and we have seen this data across all age cohorts. So my first question is to both of you, and Jeff we’ll start with you, but can you walk us through your thoughts about what to expect in terms of growth and we’ll follow with you Brian in terms of your thoughts on the global growth trajectory.

Jeff Klingelhofer: Sure. I think you phrased it very well. 2024 really is staring with a little bit of confusion. A lot of data does point to continued strength. And I think one of the really important parts that we have to keep in mind is most investors came into 2023 on the back of the fastest and highest rate hiking cycle and really a generation of investors expecting that all of those hikes would immediately, in a very short time period, result in a recession. So kind of first key point is relative to when the Fed started hiking we’re now just beginning to enter into the phase where those long and variable lags would traditionally result in an actual economic slowdown.

The second thing that I think is very important is you’re right, there has been conflicting data and even on many sides of the equation, even on the same kind of data point depends, you can cherry pick–you can pick and choose which piece you want to focus on.

So you mentioned GDP. There’s lots of ways of measuring total productivity of an economy, total production within an economy. GDP is the most classic one, and that’s a survey-based measure. So it’s literally phone calls going out and it’s polling individual households, individual companies on how much they’ve produced. Aggregating that up and saying, gosh, the US is growing at roughly 3%.

But another way of measuring total production within the economy is looking at incomes right on the back of that production. We all earn money. Companies earn money. Individuals earn money. They pay taxes. GROSS domestic income has actually been flat for the past 12 months, not growing really at all. So even within those two data prints, there’s a little something for everybody.

You mentioned employment, exact same thing. Nonfarm payrolls was on the stronger side. But then when you focus on the household survey, it’s also been trending roughly flat for the past 12 months. And the interesting one to me about that is it’s oftentimes the household survey, which leads nonfarm payrolls. So heading into periods of lower growth or higher growth, it’s generally the household survey which will inflect earlier.

So broadly, what I would say is rates have risen significantly. They have acted to pull back consumption. We’ve seen general GDP fall. We’ve seen inflation fall. The question becomes, are we heading for an outright recession or the miraculous soft landing? It’s really difficult to predict. I would caution most investors at this point, given where we are in the cycle, that the left tail risk of a recession to me is much higher than the right tail risk of off-to-the-races continued significant growth.

But there are a lot of reasons to be optimistic as well.

Rob Costello: Brian, share with us your thoughts on global growth.

Brian Burrell: Sure. And I’ll pick up where Jeff left off with that word on caution. You know, I think it’s important to remember where we’ve come from and the significant stimulus that we’ve seen across the globe has filtered through to both corporations as well as consumers. So when I think about that concept of slowing, I think it’s important for us as investors to be patient.

A lot of these effects that Jeff was talking about take time to filter through to the consumer and to the corporates. So what I’m seeing is, is a slowing and it’s tough to say how far and how fast that goes. One of the principles we like to look at is FIFO, first in, first out. You know, we saw some pretty dramatic stimulus in in certain economies like the US, a little bit less so in some of the other international economies.

So, you know what, what came up is in the US, I think it takes a little bit of time for some of that effect to come through other economies across the globe. Well, we’ve seen a little bit less on the stimulus side earlier in the past few years. So I think the effects of that coming off probably is a little bit less dramatic.

But I think the key word here is patience. It takes time for the effect of interest rate rises to filter through to the real economy. And we’re just now starting to see that. So that word of caution, I think, is pertinent across the globe.

Rob Costello: Yeah. And Brian, why don’t we turn the turn to the backdrop of global equities and global equity markets. And despite the concerns 12 months ago, returns in many regions have been quite strong and stronger than anyone expected at the beginning of 2023. And consensus estimates point to a continued resiliency in corporate earnings. The S&P 500, for example, a 12% year over year EPS estimate in terms of the growth forecast.

So what is your level of optimism? Can this momentum continue, or do you think that we’re going to experience some sort of mean reversion from last year’s stronger returns?

Brian Burrell: Sure. I do think it’s important to look under the hood. So I do think that the level of EPS growth that we have witnessed did surprise a lot of people in the markets. But if we actually look at the drivers of that, a lot of that was the lagged effects of pricing. So we look at that P times Q equation, we’ve seen pricing come through and result in the majority of that sales growth. The quantity, actual volumes, sold for a lot of the companies that we’ve seen across the globe have been slowing and pretty substantially so as inflation now, which was driving that sales growth comes off, you kind of are left with very low sales growth across the board.

Going down the P and L on a global basis, you know, we have margins that are much higher than we’ve seen in the past, and a lot of that was the pricing power we saw with a stimulated economy. That also is coming off. So margins are a little bit tenuous as well, I would say. And then lastly, if we if we go to the financial costs, well, those lagged effects of interest rates are starting to filter through.

So on the whole, I would say it mirrors what we’re seeing in the global economy, a slowing. Now there’s pockets where we’ve seen better resilience and as a fundamental investor, it’s important to recognize where those companies have benefited from one-off high inflation environments and where those companies have actual value for their customers, where they’re actually delivering a value-added proposition and have differentiation.

And so we’re seeing pockets where we think some of this growth is sustainable. But on the whole, I would say slowing is the is the key word.

Rob Costello: Jeff, let’s pivot to the Federal Reserve and what policy we expect out of them in the coming year. The Fed delivered an unexpectedly dovish message at their last meeting in mid-December, and they shifted their dot plot to an anticipation of three cuts in 2024 versus two cuts in the prior meeting. And markets reacted with a strong risk-on tone.

Right. We saw rates fall. We saw equity markets rally. My question would be, are we seeing a real change in the tone of the Fed or have the markets simply gotten ahead of the Fed and we’re actually still grappling with a Fed that is in full inflation fighting mode?

Jeff Klingelhofer: Yeah, I would say it’s a little bit of a two-pronged question in the sense that I think markets got ahead of the Fed on the way up as well. Right. So let’s rewind the clock to when the Fed had turned much more dovish. Right. At that point, they had already broadly concluded their rate hiking cycle, and that’s where the ten-year Treasury moved from

4% all the way up to 5%. Financial conditions tightened dramatically. And off the back of that, I think the Fed had every reason and right to be very concerned that that would result in a further slowdown than even they were anticipating. So to me, it’s a little bit of a question does the tail wag the dog or is the dog wagging its tail?

The Federal Reserve was forced to react to a much more significant tightening than they had anticipated. But the flip side is now we’ve seen the tenure come back from 5% back to 4%. And guess what? The Federal Reserve is actually at this point, in my estimation, my view, turning a little bit more hawkish again. So it’s a little bit of a back and forth.

But to go directly to your question, inflation has slowed, but at this point it hasn’t slowed to anywhere really near their 2% target. It’s gotten closer. It’s gotten much better. But to me, 3% is a pretty significant requirement in order for the Federal Reserve to be truly comfortable that we’re now back in a very safe, inflationary territory. So we have a number of important data points coming out, one and only in literally a number of hours here with the CPI tomorrow morning here in the US and later on in the evening for those folks listening.

But I don’t think it’s I think it’s far too early to classify the Federal Reserve as having declared victory on the battle of inflation. And so the markets have also gotten ahead of themselves. The markets are pricing five and a half roughly cuts this year. Over the last 150 years of history. we’ve seen the Fed cut by five or more times, 12 times total.

Eleven of those have been in recession. So I think it goes back to that earlier question of without a recession, I think that’s far too aggressive of a Fed easing. And I don’t think the Fed has pivoted to a stance that they need to lower rates significantly.

Rob Costello: It’s interesting because the Fed funds market is pricing in this direction of rates of the Fed funds rate that suggest recession. But yet risky assets are clearly not pricing that in right now.

Brian, let’s shift outside the US again and let’s do a specific focus on Japan. And I’d like to hear your perspective on this because as you know, Japan has been an interesting outperformer this year after years of middling performance and Japan’s also been a good example of improving performance on material ESG factors that helped drive both company performance and overall market performance.

So can you tell us what’s going on there?

Brian Burrell: It’s an exciting time for Japan. We’re reaching levels last seen in 1989, so it’s been a long journey and I think it’s important to go under the hood once again and see what’s driving companies’ earnings growth. So if we look at the net profit margins today and we compare them to those we’ve seen ten years ago, we’ve almost doubled.

If we look at return on equity, also almost doubled from ten years ago. So what’s driving this? Why are Japanese corporates getting so much better, so much more profitable? Well, we’ve looked at the governance structures of a lot of these companies and seen vast improvements. So one of the factors I think that’s lost in the hype of ESG is just simple governance, the basics blocking and tackling and having management align with shareholders.

Well, what we’ve seen in Japan is a vast increase in the percentage of companies that have majority independent boards. And this is really important because what we’re seeing as a result of this improvement in governance is a little bit better capital allocation. You know, Japan has always been known for producing great products. Some of the technology and engineering has been, you know, world class best, best in the world.

But now we’re actually seeing companies harness that product quality and generate better profits. And that’s translating into great returns for Japan. So I’m relatively optimistic on the Japanese market because I don’t think this is reflected in valuations. If I look at the gap between, say, Japan and the US that’s actually widened and the improvements that we’ve seen in Japan are arguably outpacing those in the US.

So it’s a promising market.

Rob Costello: Yeah, that’s really interesting to hear. And Jeff, we’re going to we’re going to go back to the U.S. As you can see, we’re bouncing around the globe here. In this case, let’s discuss the government balance sheet. And in 2023, there seemed to be a renewed focus on the health of the government balance sheet and the ability of the government to handle its debt load. There’s been a notable rise in the government’s net interest costs over the last couple of years, which of course has coincided with the Fed hiking cycle and the rise in interest rates. What would you say to investors who are concerned about the government balance sheet?

Jeff Klingelhofer: Yeah. I think even before we get to the government balance sheet, it’s important to talk about the broader economy.  You mentioned the consumer. You can really think about the world in terms of three primary balance sheets. You have the consumer balance sheet. We’ve already mentioned they are seeing some significant slowdown and increased delinquencies. It’s broadly contracting. The next balance sheet, you have the corporate balance sheet. There’s a very similar story at play there. But the important caveat, both those balance sheets, the consumer balance sheet as well as the corporate, have done a great job of terming out their debt. Exactly what you should do in a world of previously very low interest rates.

And so, the third balance sheet, the one you are asking about now, the US government balance sheet in particular…One, we have borrowed a lot, so the balance sheet has become extremely bloated. The challenge is we haven’t done a great job of terming out our balance sheet. And so, as interest rates costs have risen, or as interest rates broadly have risen, this translated very quickly into an increased requirement of funding in order to continue to meet the interest costs of those payments on that balance sheet.

What we are seeing in 2024 is a phenomenally high amount of debt issuance and on the back of that, a lot of investors have questioned, one, is it sustainable? And two, at what yield level?

The way I would answer the question is these challenges potentially play out over many, many decades. I don’t fear an actual default of any form, certainly in the next 5, 10, 15, probably even 20 years. I really do think the story there is far too premature. But the second part of that story the question about bond vigilantes, forcing or requiring higher yields to invest—I think all else equal, that’s right. But we have to remember this story has been in play for quite some time. Is that partly responsible for the rise of 10-year Treasuries from 2 percent to 5? Yes. But it would be the exact same story when Treasuries went from 5% back down to 4%, right? And so there is a supply demand. Absolutely supply is higher. But I would argue all else being equal, demand is higher. I don’t anticipate a significant disruption in the Treasuries market because of the financing needs of the US government.

Rob Costello: I appreciate the perspective, Jeff. What we are going to do right now is we are going to mix things up. We’ll leave the question and answer at the moment, at a pause. And what we are going to do, it’s called a lightening round. We’re entering what’s soon going to be the year of the dragon, so let’s have some predictions about what the coming year is going to be like, so why don’t we do this? I’ll throw out a bunch of questions about a few market topics and let’s have some rapid-fire answers—one or two words. These may be crystal-ball like questions and we don’t have a crystal ball right in front of us, but we’ll do the best we can. Are you guys ready?

Jeff Klingelhofer: Let’s do it.

Rob Costello: Alright. What will the level of the S&P 500 be at the end of 2024?

Brian Burrell:  Violently flat.

Jeff Klingelhofer: I love the answer. I want to take it. But I’ll go with 4700.

Rob Costello: Alright. But you’re off to a good start there, Brian, on the creativity. What about the 10-year US Treasury yield?

Jeff Klingelhofer: My view is a little lower from here, so 3.70.

Brian Burrell: I’ll go with Jeff. Maybe a little bit lower, but 3.8.

Robert Costello: Okay. End of 2024 price of oil?

Jeff Klingelhofer: 72/73 dollars, about where we are now.

Brian Burrell: 75, but big spikes.

Rob Costello: Okay. Number of Federal Reserve cuts by yearend 2024?

Jeff Klingelhofer: I know you only want single words. Barring a recession, 2.

Brian Burrell: I’ll go with the Fed, 3.

Rob Costello: Which outperforms broadly, growth or value?

Brian Burrell: Growth, ex-Magnificent Seven.

Jeff Klingelhofer: I was just going to say, broad growth.

Rob Costello: Okay. That leads into the next question, actually. Magnificent Seven, rallies or fizzles?

Brian Burrell: Whew. Fizzles.

Jeff Klingelhofer: I am going to say, I like to say Drag Seven, because it can drag in either direction, but I am going to say “fizzles” as well.

Rob Costello: Yeah, Brian definitely gave us a clue what that answer would be like for that last question. So, that’s our lightening round, so let’s get back into some more market topics.

I want to ask for perspectives from both of you with this. It’s an election year in the United States, but it’s also elections all across the globe in 2024. We have an election in Taiwan this Saturday, right? There is an election in India in the spring. There’s about 60 some countries that have elections either on a presidential, legislative or parliamentary level. So, it seems like it could have an impact and that’s why I want to ask you about it and have you share your thoughts. What impact will elections and politics have on investment assets in 2024? Let’s start with you, Brian.

Brian Burrell: Sure, well I think if there’s one rule of thumb I’ve followed in my career, it’s if there’s an election, politicians want to be re-elected. What do they like to do? They like to spend to be re-elected. So, I think that translates to opportunities in equity markets, so if you are on the right side of that, infrastructure is one area that we particularly like. And coming off of COB ’28, where we are as a globe focused on the energy transition story, I think there are a number of pockets where politicians across parties, across the globe, will agree on areas for infrastructure spending has benefits, not only for the population immediately, but for the longer term. So I think that that infrastructure stimulus and spending is one direct result of election cycles.

Also, I think it’s important to remember the knock-on effects of fiscal stimulus. That’s a little bit of inflation. So, if you are putting more money in people’s pockets that has a tendency to result in some of this inflation that we are seeing coming down, perhaps being a little bit stickier, and consequently, the implications for interest rates to maybe stay a bit higher, and valuation multiples may be struggling a little bit.

Jeff Klingelhofer: I would say relatively similar to Brian, I think it’s a huge opportunity, but it’s also a period of very significant uncertainty. But I think, especially in the US, everyone at this point is anticipating a replay of the last election cycle. I am not sure that actually will. I think that there’s a lot that can happen between now and ultimately when we go to the polls finally. But even if we do, I don’t think that either incumbent President Biden or Trump in a second cycle is likely to react in the exact same ways that they have looking backwards.

I think that yes, it’s a period of opportunity, but I would say very cautiously, I do think that on the back of all these geopolitical elections there is the potential for flare-ups that we have seen across the globe. And you never know when any one of those potentially is going to come to fruition. I think that election cycles and elections broadly depending on outcomes really can stoke some potential concerns from investors. So, again, I am seeing it as a period of cautious optimism.

The only other thing I would say relative to some of that fiscal stimulus is I do worry a lot more about inflation. And Brian brought this up. Right? A lot of investors have seen inflation come down. You have asked the question about the Fed. As an industry, we broadly think we have won the war on inflation, but I like to point to house prices as one piece of that. We have talked about government stimulus as well. That’s probably one of the big pieces that, looking back to 2023, the reason we didn’t get a recession. I think it’s really hard, given where government deficits are today, to be as stimulative, even if we do see a slowdown so I think that’s a surprise yet to come. Even if in 2024 we do see a slowdown, the government won’t be nearly as progressive in some of their stimulus.

As well, some of those lagged effects of inflation coming down are because they were such easy   laps. Inflation was so high it was easy to come off those highs.

But housing is one example. But housing is one example, owners’ equivalent rent has tracked it down, but house prices are now inflecting back up and so owners’ equivalent rent will likely follow it back up as well. I think that’s true with a lot of those long and variable lags within the inflationary cycle. So optimistic for some countries, a little less optimistic within the US is perhaps the way I would finalize that.

Rob Costello: Yeah, I appreciate that, Jeff. And let’s turn back to the equity market and specifically Brian with equity valuations, since the 12-month forward PE on the S&P 500 was about 20 times entering the year and versus the beginning of last year is about 17 times. Many non-U.S. markets did not see as much rerating the last 12 months, of course, and are significantly less expensive, we would say, in both absolute terms and relative to their histories.

As a global investor, how are you thinking about the relative opportunities within regions right now?

Brian Burrell: Sure. I mean, I think you highlighted that gap, and that’s the most important factor I’m looking at is the US has remained quite expensive while a lot of other regions are at or perhaps below their long-term averages in terms of valuations. And so that’s a constructive starting point for non-U.S. equities.

I think it’s important to break it down further and to look at where you actually see pockets of growth. Now, you know, the growth trajectory in some countries has come down quite a bit as well. But when we look at equity markets, you know, here at Thornburg, we’re generalists, we’re not siloed. And so we often find a lot of companies that happen to be domiciled in certain equity markets, but which actually have global businesses levered to some of those global themes.

I talked about infrastructure, for example, or, AI, you know, some of these other places where corporates are increasingly willing to spend. So I guess what I’m looking for is those non-U.S. markets, but where those companies within them are leaders across the globe, multinationals that are able to lever their own growth trajectories to that global framework, which is a little bit more constructive than individual countries, which may have, you know, a little bit more difficult position.

Rob Costello: And Jeff, let’s segue back to fixed income and specifically about how much investors have loved cash instruments over the last couple of years, whether it’s money markets, treasury bills, and for good reason, because yields have been higher, investors have been pouring money into the very front end of the curve. Money market assets are at record highs and they even continue to increase in the fourth quarter, which was for fixed income, the strongest return quarter that the sector has had in years.

So simply put, is fixed income at least in 2024, is fixed income and not cash going to be king?

Jeff Klingelhofer: Yeah, I think, look, if you’re coming off a period of 2023, it made sense to be in cash. In many ways, rates were high, and fear of recession was also high. But anyone that just stayed in cash or 2023 really missed out on some very interesting term returns.

Whether that be fixed income, as you note, or equity globally or here in the U.S., I think there’s a little bit of FOMO, fear of missing out, that probably is going to take place in 2024. And I think it’s very prudent as well. The economy is showing some signs of resilience, but importantly, we’ve touched on this theme also.

I think we’re at least at minimum, we can agree we’re past peak rates, right? So the next move from central banks around the world is that rates are likely to fall as a result of that. The nice part about cash is, you know exactly what it’s going to do, right? It’s not going to go up in value. It’s not going to go down in value.

But I think it’s safe to say in 2024, it’s not going to yield as much either. And so the opportunity as you point out, is to take and move away from that very short-term instrument with relatively high yield, extend out duration. That’s still very interesting yields. I mean, even in today in a very high-quality portfolio, it’s easy to beat the return on cash if you assume no market moves.

But it’s even easier if you assume that rates are going to come down across 2024, which is to say consensus, that at minimum, even though I’m a little bit behind the amount, the rates are going to come down, I do think rates are broadly going to come down in 2024. So all else equal, I think investors should be moving off the sidelines out of cash.

I think some of it’ll go into equities. I think that’s appropriate. I think some of it will come within the world of fixed income. But if you’re playing, if you’re trying to play defense, the opportunity in fixed income today really is tremendous and investors should be coming off the sidelines. I do think it’ll be the year of the bond.

Rob Costello: Sounds good.

And what we’ll do is we will segue here to the Q&A session and for folks out here in the webcast, or as a reminder, two ways to ask a question. You can send an email to questions@ thornburg.com that’s questions@thornburg.com, or you can type a question directly into the webcast. I will tee up a question just while we’re bringing the questions in from the audience.

And I just wanted to talk about artificial intelligence. AI Something that you briefly mentioned there, Brian, but you know, as we all know, AI has driven market optimism. Last year I wanted to get and you, Jeff, as well, your perspective on AI. And just so you guys know, I asked A.I. this question and they told me to ask you guys, so I’d love to hear what you guys think about it.

Brian Burrell: Well, AI is not this answer. This is my answer. So for what it’s worth, like I mentioned on a global basis, with relative valuations in equities, I think it’s important to remember that AI is a very broad topic and there are many companies across the globe which are levered to AI. So I think a picks and shovels approach.

I like to find those companies which are providing the infrastructure for the production of the semiconductor chips, as well as providing the applications for both consumer as well as professional products. You know, we’re seeing the very early days of the applications of AI into real products that companies are monetizing.

You know, I see areas like the legal profession. So here we’re seeing some of that kind of grunt work that your average first year associate would be undertaking is being taken by A.I. That’s a real value add for those customers of those services. So, you know, I like to say 2024 may be the extension of AI as a concept and on to the monetization of AI for real product and service.

Jeff Klingelhofer: Yeah, maybe all I’d add to that is to me this feels a lot like robotics was back in the eighties, right? Robotics was supposed to revolutionize everything we did. And incredibly quickly. That’s not to discount what robots are doing in the real world today, but here we sit nearly 40 years later, right? I think that A.I. is a very long tailed story.

I think, like Brian said, we are seeing some of those early indicators of the way it will impact our real lives. But what I fear is the market has gotten so far ahead of itself with the belief that I really has the solution to many, many problems. And I think what we saw with robots in complex situations, it’s taken much longer for them to get there.

And I think AI is exactly the same thing, right? We’ve already seen some of the challenges of AI that it spits out wrong answers, outright wrong answers, right? There’s a lot of training that needs to go on. I think it’s really a decades story, not a one or two or three year story.

Rob Costello: I appreciate that, guys. And we’ll turn to a question from the audience.

And that question is, when do you foresee the election year maybe forcing the Fed to cut rates earlier than expected or potentially maybe of the election year having an influence on that, potentially in March. What are your thoughts, Jeff?

Jeff Klingelhofer: Yeah, I think there’s kind of two questions embedded here. I think the first is does the election cycle even play into the Federal Reserve stocks?

And look, I’m a little bit of a Fed apologist. I’m relatively unique in the industry in the sense that I don’t like to bash the Fed. I think that they really are data dependent. You know, I think the Fed has actually done a very good job of telling us the direction in which they’re going to head and really even the ending points. It’s been the markets that have said, you’re wrong, Fed, sorry, we know better than you.

And thus far we haven’t known better than the Federal Reserve. I go back to the Federal Reserve. To me, their reaction function is fundamentally different in a world where they were trying to pull down inflation from high levels versus where they are trying to push up inflation towards that 2% trend. I think that will cause a little bit of confusion.

But if history is any guide, seeing either a rate or a cut and it really doesn’t skew one direction or the other into an election year, is far more common than the Federal Reserve being on hold. And so I would watch just GDP, I would watch inflation closely, and that will dictate where the Federal Reserve moves. I don’t think the election cycle plays out.

Now, the second part of that question is not only how many Fed cuts do we envision right now, I said I think two barring a recession, but when do we actually get them? I think March is as good of a guess as probably anything. But on the back of that potential cut in March or perhaps early summer, I think it’ll be a relatively hawkish cut.

Right. It’ll be we’re recalibrating monetary policy and we’re bringing rates down a little bit, but we really need to price out the expectation of five.

Rob Costello: Okay. And the next question, and it’s a pretty straightforward one. But and on the equity side looks like, but which sectors will you favor in 2024?

Brian Burrell: Let’s go back to where we started, Rob. We begin with uncertainty and when we’re in uncertain times, I like strong businesses.

I like those businesses in sectors where they largely control their own destiny. That often takes the form of IP, strong brands. So some of those sectors that were left behind in 2023, you know, consumer staples, health care, for example, they trade at relatively attractive valuations. And yet those are really some of the companies that control their own destiny, have pricing power and strong products and services that are difficult to replicate.

So I guess I’m retrenching a little bit and going for higher return on capital businesses and those that kind of control their own destiny in 2024.

Rob Costello: And there’s one more question that we have from the audience, and that is, do you believe or do you each believe That said, the cuts could drive EM performance in this cycle?

Brian Burrell: I think is a good starting point. You know, we saw that relative valuation graphic earlier where EM has really been left behind relative to like the US, for example. So, you know, EM typically responds quite positively to a weaker dollar, if we do in fact get some of the Fed rate cuts, I think the dollar’s in for a pause and I think that’s a good setup for an EM equity class that is you know, not aggressively valued and perhaps sees a little bit more stability in terms of currencies.

Jeff Klingelhofer: Maybe the only thing I’d add to that is I think it’s important. I completely agree. I think we’re in for a dollar pause or an outright dollar decline. I think that’s positive for EM. The only bit of caution, again, the word of the day, I think, is as we go back, the markets are pricing in a lot of potential cuts.

And so any surprise that doesn’t meet market expectations gives me a little pause. But the other pieces, I do think the Federal Reserve is higher for longer and that will continue to be a headwind relative to EM growth. But Valuation as a starting point is also incredibly important. And I think there are some really attractive opportunities within the world of emerging markets.

Rob Costello: and we’ll actually take one final question here and make sure we get questions in from the audience in the webcast.

And this one, pretty straightforward one. But China’s stock market, is it a buy because of low valuations or still some caution?

Brian Burrell: Well, let’s start again with valuations. You correctly mentioned we are at multi-year lows in terms of Chinese equity valuations and that’s a good starting point. But what we need to see is animal spirits reignited in China.

We’re seeing pockets of optimism. So we look at the rejiggering of supply chains that’s occurring across the globe. Oftentimes what that means is companies are diversifying where they produce. ASEAN is a big, big beneficiary here. And there’s a lot of Chinese companies that are supplying into those countries, providing the machinery and other products that are enabling those companies to become suppliers to the rest of the world.

So, you know, we’re taking a few steps back in terms of where the supply chains are getting their, you know, real machinery from. But those are the areas where I see low valuations and potentially, you know, an acceleration in growth in some instances. So that’s a good starting point. But I’d say for the market as a whole, it’s going to be really important to see that confidence return.

Rob Costello: Thank you, Brian. And I want to be cognizant of time. And so we’re going to bring this webcast to a conclusion. And I want to thank you again, both Jeff and Brian, for your time and your insight today. And thank you, everyone, for attending this webcast. I hope you enjoyed it as much as we did. And we love to hear, to hear what you think, and we’ll be making this replay available soon.

We’ll certainly let you know of future webcasts. And so we thank you again for joining this Thornburg Investment Management webcast, and we will see you again soon.

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