The sociologist Robert K. Merton developed the term self-fulfilling prophecy in one of his books , stating that internalizing a false assumption can generate new behaviours that make it true through the collective contagion of behaviours. This year, the predictions of many economists who took for granted a recession of the American economy, against all odds, didn’t come true. From our experience in the markets, we know how difficult it is to predict a recession. In fact, economists throughout history have predicted more recessions than have actually occurred. This time was no different, despite the fact that many indicators pointed in that direction. Perhaps the high levels of savings achieved during the pandemic, the unexpected strength of the labour market and more expansive fiscal policies have been the supports of the economy and have prevented economic agents from being infected by these bad omens.
The market is pricing in a soft landing for the economy this year, which has led to a lowering of the probability of recession in the US. In Europe, on the other hand, growth forecasts remain rather depressed, increasing the likelihood of recession. We are witnessing what economists have termed a moving recession, with some sectors already very close to the earnings floor, while others are still enjoying positive inertia. Leading indicators of manufacturing activity have remained at recessionary levels throughout the year, while those of services have remained in the expansion zone. With a large part of our demands for post-pandemic experiences (travel, concerts, leisure, etc.) satisfied, we expect a convergence of these indicators that could come further due to a worsening of the services sector.
We ended the year with high double-digit gains in the main stock indices, although the road has not been without its bumps. After overcoming the declines caused by the problems of the American regional banks and Credit Suisse in the first half of the year, the second half of the year has not ceased to be easy. Fixed income has also benefited from the change in central banks’ discourse and, after reaching peak rates in October, has experienced a rapid decline.
One of the main elements that has conditioned the markets has been the actions of the monetary and fiscal authorities. The US Treasury’s announcement at the beginning of the summer of its intention to issue longer-term debt and fears of “higher for longer” rates led to a major tightening of financial conditions and led markets to hit lows at the end of October. Market jitters forced the Treasury to reverse this decision by increasing short-term debt issuances. This change in policy, along with the Federal Reserve Chairman’s statements announcing the end of the rate hike cycle and the fall in inflation data, marked the beginning of the spectacular rise in the markets.
With the pause of the Central Banks confirmed, the focus will be on confirming whether the aggressive rate cuts that the market is discounting materialize or not, since the statements of the monetary authorities seem to indicate that they will be more moderate and inclined to the second part of the year. Disinflation and its speed of decline will mark the moment.
The risk associated with the outbreak of the conflict in Gaza, which initially added some uncertainty to the markets, seems to be limited for the time being, although we are aware of the increase in war tension in the Red Sea, that may generate new disruptions in supply chains and cause occasional increases in inflation. This year, politics will play a very prominent role. Countries that represent more than 40% of the world’s GDP will hold elections (Taiwan, the US, Europe…), which could have significant repercussions on the markets and cause a clear increase in social polarisation, as we have experienced in recent electoral processes.
On the equity side, we see markets very close to all-time highs. The rise in the last two months of the year has been of such magnitude that for the first part of the year, we expect a consolidation of these levels or a slight correction, especially in the most cyclical sectors. While waiting for these opportunities to increase the level of risk to arise, we remain cautious and with low levels of exposure.
The outlook for fixed income looks reasonably good. We expect the disinflation process to continue and economies to slow down, particularly the U.S. economy. For this reason, we continue with a strategy of increasing duration to yield spikes, mainly through both European and American government debt.
All of our mixed funds have performed positively for the year, returning to near their peak levels. Loreto Premium Global F.I. has obtained a return of 8.2% in 2023, Loreto Premium Mixed Equity F.I., 10.5% and Loreto Premium Fixed Mixed F.I. 7.1%. The Loreto Premium Fixed Short Term, F.I. fund has returned 2.4% since its launch in March 2023.
Loreto Premium Global, F.I. (investment fund registered in the CNMV and with risk level 3, on a scale of 1 to 7). In recent years, the fund’s R class has posted the following annual returns: 2019: 4.58%, 2020: 3.28%, 2021: 5.86%, 2022: -7.64%. 2023: 8,22%
Loreto Premium Mixed Equity, F.I. (investment fund registered in the CNMV and with risk level 4, on a scale of 1 to 7). In recent years, class R has shown the following annual returns: 2019: 8.68%, 2020: 0.08%, 2021: 7.44%, 2022: -8.74%. 2023: 10,53%
Loreto Premium Fixed Mixed, F.I. (investment fund registered in the CNMV and with risk level 3, on a scale of 1 to 7). In recent years, class R has shown the following annual returns: 2019: 2.57%, 2020: 0.22%, 2021: 2.60%, 2022: -6.71%. 2023: 7,09%
Source: Authors’ own creation and Inverco. Past performance is not indicative of future results. Running expenses are already included in the profitability calculation. Check out the legal documentation, advantages and risks of mutual funds in www.loretoinversiones.com
January 2024
DEPARTAMENTO DE INVERSIONES
LORETO INVERSIONES SGIIC SAU
