BBVA AM warns that the labor market remains tense and could put a drop in inflation in 2024 at risk

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BBVA AM warns that the labor market remains tense and could put a drop in inflation in 2024 at risk

He believes that major central banks will start reducing rates in the first half of the year and is betting on fixed income.

The director of Global Strategy of BBVA Asset Management (AM), Joaquín García Huerga, warned that the labor market “remains tense” in the US and the eurozone and that could put at risk the estimated reduction in inflation for 2024, that the The manager estimates that it should converge to levels close to, but above, 2% in both regions, in general and at low rates.

During the presentation of the views prepared by the BBVA manager for 2024, García Huerga indicated that “moderate” growth is expected – 1.4% in the US, 0.6% in the euro zone and 4.5% in China–, therefore, together with the normalization of inflation, the Federal Reserve (Fed) and the European Central Bank (ECB) should start lowering rates in 2024 and, in particular, in the first half of the year.

On the one hand, BBVA AM believes that the Fed will reduce rates by 100 basis points or “at most” to 150 points in 2024, while the ECB will do so “up to 100 basis points” for year in general, that is, which will be lower than that made by the US central bank.

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“We have always chosen to think that central banks want to be very sure that inflation is defeated. So, there is a certain ‘give and take’ between a still strong labor market and the certainty of central banks. bank that inflation is dominated. In other words, it is the tense labor market that will somewhat slow down the planned reductions of the central banks, although the central scenario is clear: they will lower interest rates in 2024, “said García Huerga.

FIXED INCOME BET
Regarding the setting of the financial markets, García Huerga pointed out that it has “changed radically” in a year due to the increase in interest rates and the observed decrease, which represents an opportunity to build the portfolio with a significant emphasis on fixed income and positive expected returns.

As two possible and “minor” risks with fixed income, the director of Global Strategy of BBVA AM indicated, on the one hand, inflation, and on the other hand the increasing emissions of paper to the market to finance high public deficits, because they could put “some upward pressure” on rates, especially in the United States.

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Within fixed income, the manager considers both developed and developing countries attractive. The latter offer “high profits” and some central banks in this area are already immersed in the cycle of rate cuts. High quality or ‘investment grade’ credit can also be interesting in terms of its profitability and risk.

POSSIBLE DOUBLE-DIGIT INCREASE IN THE EUROPEAN STOCK MARKET
Regarding the stock markets, BBVA AM shows that the aggregate valuation of these markets remains close to its historical average, although there are notable divergences. In this sense, he explained that the S&P500 presents a “demanded” valuation compared to its history, while many European or developing indices are below it.

Likewise, he believes that business margins may continue to show low resistance from current levels, still helped by some inflation that supports sales figures and companies that are given “a high level of -flexible” after the Covid-19 pandemic. As a counter, the manager highlighted the “growing” pressure on costs, especially wages.

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Thus, for the US, it is estimated that business income will rise by around 7% in the United States, between 3% and 5% in Europe, and at least 2% in Spain, although in the latter case “with potential for that the last number is higher”.

“Therefore, and as a result of a valuation with room for improvement and an increase in corporate income, the European stock market may register an increase of up to double digits in 2024, including Spanish. In the case of the US stock market, the potential lies more in profit growth than in valuation and may rise “somewhat lower than in Europe,” he explained.

“In terms of expected risk-adjusted return, we prefer fixed income to variable income. However, due to the current uncertainty about the economic cycle and the geopolitical situation, it is necessary to consider that the positioning may require a dose of flexibility in the course of the year. 2024”, concluded García Huerga.