In 2023 many investors were positioned for a US recession that ultimately did not materialise. Despite many challenges such as a banking crisis in the USA, geopolitical tensions, and a real estate crisis in China, the global economy was resilient and risky assets performed well.
Year-to-date, credit spreads declined by around 20 basis points (bps), while government bond yields rose by about 30 bps in the US and fell by 40 bps in Europe. Due to high all-in yields, EUR and USD- denominated credit enjoyed solid returns of 6.3% and 5.2% respectively. In 2024, lower growth and inflation could set the stage for a global easing of monetary policies (base case). However, this is largely priced by markets, which could lead to significant volatility in rates and spreads if upcoming data deviated from that scenario. If both inflation and growth exceeded expectations, this could be detrimental for investors as spreads and rates would likely rise from current levels (scenario 3). Conversely, a global recession could still yield attractive returns, as any increase in credit spreads is expected to be counterbalanced by a more pronounced decrease in interest rates (scenario 1). In the current environment, investment grade credit is one of the most attractive asset classes. High all-in yields and the potential for lower interest rates, set against a generally benign economic backdrop, positions this asset class for potentially high total returns in 2024.
