The main reason for the record rise in bonds in November is because of the positive data on inflation and the US labor market, and the period of declining inflation continues. The US labor market has shown that it is not as strong as it has been in recent months, leading investors to believe that the strongest period has passed. Combined with lower inflation and a peak in economic growth, it has led to a pretty good opportunity for bonds, which have begun to calculate that next year, rates will begin to gradually decline. This was commented by Daniel Donchev, executive director of “Expat Asset Management” in the program “The World is Business” with presenter Ivaylo Lakov.
“Once we have lower inflation rates, there won’t be a need for such high interest rates.”
Donchev still reports that the bonds had a weak period in the last few months – from May to the end of October, they lost serious percentages. Stocks, like bonds, performed extremely well in November. Macroeconomic data and lower inflation positively impacted the stock market, which is also negatively correlated with interest rate hikes. This reassured market participants that they had seen the highest levels of interest rates in the US, Europe and developed countries, followed by holding or cutting rates.
Central banks mainly monitor the so-called core inflation excluding fuel and food prices, which is driven by demand in the economy rather than supply. The trends are that inflation will continue to decline and even if there is an increase in commodity prices, it will not be enough to bring back the unwanted high levels of inflation. Already, the difference between wage growth and labor productivity is very small, which means that the contribution to inflation will be minimal, Donchev also noted.
European indices are mainly formed by large companies whose business is global. A stable economy is possible in the coming months, but the long-term effects of higher interest rates and geopolitical tensions are yet to be felt. This combination will work in the opposite direction and in the next 2-3 months the economies will be stable, but after that it is not certain at all, commented Donchev.
“After the first quarter of 2024, it is possible to witness a serious weakening of the global economy and a potential entry into recession,” predicted the guest.
Donchev summed up 2023 as a much better year for markets than 2022. Globally, stocks performed relatively well, although gains were concentrated in a few large companies – mostly tech in the US amid the AI boom.
“A soft landing of the economy means a drop in inflation and at the same time a drop in the economy to the extent that growth is not negative.”
Bulgaria’s economy is open and a lot depends on what is happening on a global scale. The economy is operating at full employment and wages are growing quite well, outpacing growth not only in Europe but globally. Our economy is currently stable, with a lot of liquidity in the system and people having savings accumulated during the pandemic. Interest rates in our country are extremely low compared to Western Europe. Domestic consumption will act in a positive direction, but with the passage of time, global factors will begin to have an impact, Donchev believes.
“The futures we follow have started to calculate an almost certain rate cut in Europe and the US in April or May.”
The zero interest rates we have witnessed in recent years will not return anytime soon, even if we witness a recession. Such non-conventional measures, which central banks have used over the years – such as quantitative easing and paper buying – we will not see soon either, Donchev predicts.
When making an investment decision, the company takes into account climate standards and green policies, and more and more investments are directed to companies that have a better assessment of compliance with these standards. On the other hand, this incentivizes companies to comply with the standards more and more.
“When a company issues an ESG bond, the demand is many times greater than for a non-green bond of the same company.”
Directing major investments to green projects leaves old sources without investment and this leads to their higher prices. For this reason, we will continue to see pressure on the price of oil, as they do not have a serious investment on a global scale.
According to Donchev, the asset sectors with good growth potential in 2024 are companies dealing with healthcare, consumer goods, artificial intelligence and defense and security.
The material is not a recommendation for making investment decisions.
See the full comment at the video of Bloomberg TV Bulgaria
2023-12-01 20:34:00
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