A series by finews.asia has different fund managers talking about New Year’s customs in their favorite cities or hometowns.

By Matt Lawton, Portfolio Manager Global Impact Credit Strategy at T. Rowe Price

Our New Year’s Eve tradition is to host a party with close friends, watch college football, and count down to the ball drop at midnight.

On New Year’s Day, we watch the Rose Bowl parade; gather with extended family; and eat traditional dishes such as black-eyed peas, which are meant to bring good luck in the new year.

Surprisingly Durable

Matt Lawton (Image: T. Rowe Price)

Will the markets have a happy year? Core inflation has gradually slowed, and the labor market has been loosening in an orderly fashion, giving the Federal Reserve (Fed) greater flexibility with monetary policy. While we are likely very close to the peak in interest rates, with surprisingly strong recent growth data and the market pricing in more cuts in 2024 than the Fed projects, yields still have the potential to rise in the near term.

The US economy has remained surprisingly durable given tight financial conditions. Regional banking stress has dissipated but remains a risk that we are monitoring closely. Ultimately, our view on the direction of travel – as well as the destination – remains unchanged, but the timing continues to be pushed out.

We remain positioned for curve steepening, which we see working if the end of the hiking cycle leads to lower short-term rates or if a soft landing produces higher long-term rates.

Europe Under Pressure

In Europe, the deterioration in activity and the degree of slowdown in inflation momentum appears to have persuaded the European Central Bank (ECB) that monetary policy is now sufficiently restrictive. Rates are likely to stay elevated for some time, however, and the ECB could accelerate quantitative tightening, but overall, we see little impetus for higher European rates from here.

In credit markets, we look to take advantage of our analysts’ best security ideas while monitoring markets for any pricing dislocations. Nearer term we think credit could continue to perform reasonably well although we are wary of the potential for an economic downturn and are prepared to wait before adding risk more meaningfully.

Attractive Banking Sector in Europe

Attractive value continues to emerge in the market, notably in the banking sector recently, and particularly in Europe where fundamentals are solid, and we have participated in more idiosyncratic opportunities. Likewise, we continue to find compelling impact investments.

We have tilted to a more constructive view in the near term given increasingly dovish Fed commentary, resilient corporate earnings data, and positive technical set-up into year-end. In the medium term, we are more cautious as the economic growth and earnings outlook appear more challenged.

Complex Environment

We will continue to draw on our broad and deep global research platform to parse the complex macro environment while focusing on identifying the highest positive impact investment opportunities.