by Claude Chendjou
PARIS, January 19 (Reuters) – A balanced and diversified allocation of financial assets is essential in the face of still high inflation and key rate cuts expected this year, says Neuflize OBC, during the presentation Friday of the economic and financial outlook of the French bank.
“There is going to be a big challenge this year: central banks will probably lower their rates and potentially very aggressively, which means that liquidity will once again pay less than before while inflation will remain high,” underlines Olivier Raingeard, investment director Neuflize OBC, subsidiary of the Dutch bank ABN Amro.
Neuflize OBC sees the deposit rate of the European Central Bank (ECB) standing at 2.75% this year and falling to 1.5% by mid-2025 against 4.0% currently, while the inflation is expected to slow to around 2.3% this year.
Olivier Raingeard explains that from 1990 to 2023, nominal yields and real yields, that is to say adjusted for inflation, have always been positive due to low average inflation, of 1.5%.
“Constructing asset allocations was then quite easy,” he continues, noting that it will now be necessary to think about real profitability in terms of expected return for the next 10 years.
He underlines that the impact of inflation on the valuation of a “safety” allocation composed of 50% monetary assets and 50% euro funds is significantly different depending on the evolution of prices.
IMPACT OF INFLATION
The bank uses three scenarios with inflation at 0%, another at 2.2% and a final one at 4.0, and notes that the performance of a monetary security portfolio over 10 years would be respectively +26%, 3 % and -16%.
In the strategy of a balanced management orientation, the bank recommends a portfolio composed of 55% stocks, 35% bonds and 10% money market, while alternative funds are 0%.
For this year, Neuflize OBC says it is “neutral” on both equities and bonds, while offering diversification mainly in money markets.
“We are neutral on stocks because we consider in our soft landing scenario (soft landing of the economy) that we should have single-digit growth in the stock markets over the year 2024,” explains Olivier Raingeard .
He also judges that the markets have been quite aggressive in their behavior with the very strong rebound observed at the end of last year and that uncertainties weigh on the profit growth of companies at least for the first half of 2024. .
Despite these near-term risks, the bank does not have an “underweight” recommendation on stocks because it rules out a deep economic recession.
The US economy is expected to grow by 2.8% this year, Europe by 0.6% and China by 4.7%.
Concerning bonds, Olivier Raingeard says he is not underweight either, but that there could be a little volatility in this asset class during the first quarter, at least until we have a little more visibility on the decisions of central banks.
He notes, however, that uncertainty should not justify inaction while 2024 will be a record year for elections around the world, particularly in the United States.
Olivier Raingeard maintains that in view of past shocks, the volatility caused by the various crises (Brexit, election of Donald Trump in the United States, trade war between China and the United States, COVID-19 pandemic, conflict between Russia and Ukraine) on the markets has always been temporary. (Edited by Sophie Louet)
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