Finance

In Joseph O’Neill’s novel “Netherland”, a jaded equities analyst, covering oil and gas firms, confesses to the tricks he uses to add credibility to his stock picks. “Voice a first-hand opinion about the kebabs of Baku”, he says, “and people will buy almost anything you follow up with”.Financial analysts, like journalists, split their time between deskwork and roadwork: meeting executives, inspecting operations, tasting the local cuisine. Are these escapes into the outside world worth it? Travel can be eye-opening. Managers may reveal more in situ than they would on an earnings call. But roadwork is also time-consuming and potentially misleading. Charismatic managers with flashy facilities can employ their own tricks. Stray impressions can skew a visitor’s judgment.In a new paper Azi Ben-Rephael of Rutgers University, Bruce Carlin of Rice University, Zhi Da of the University of Notre Dame and Ryan Israelsen of Michigan State University investigate the benefits of travel. They track 336 analysts of American stocks from 2017 to 2021, estimating the length of their office days from the time they spent logged in to their Bloomberg terminals. Analysts who did not log in during a workday were assumed to be travelling for work.Logging off and getting out has some costs: peripatetic analysts issued fewer forecasts. But their stock recommendations made more of a splash, moving the market by more than their peers’ picks. They were also more likely to be rated as “star” analysts in the rankings published by Institutional Investor, a magazine.Was this prestige deserved? Escaping from the office does, after all, give a stockpicker more time to schmooze with the institutional investors who contribute to rankings. And it fills their sleeves with more seductive tales to tell.On the other hand, the paper shows that the forecasts of well-travelled analysts were also significantly more accurate than those of their peers. Causality is hard to establish: perhaps better forecasters earn more freedom to roam the world. However, the authors demonstrate that when the covid-19 pandemic struck in early 2020, clipping the wings of analysts who had previously travelled frequently, the accuracy of their forecasts deteriorated disproportionately. Travel helps analysts. It’s not just the kebab-tasting. It’s also the tyre-kicking. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Land in any Indian city, such as Bangalore or Hyderabad, and you will be struck by its heady optimism. India’s economy may be in the early stage of a historic boom. Recently released figures show that economic growth roared to an annualised pace of 7.6% in the third quarter of 2023. In the past few weeks four international forecasters have raised their growth projections for the year, from an average of 5.9% to one of 6.5%. The National Stock Exchange of India is now neck-and-neck with Hong Kong’s stock exchange for the title of the world’s seventh-largest bourse.Pause for breath, though, and India’s performance looks a little less impressive. GDP growth has been slightly slower under Narendra Modi, India’s prime minister, who was elected in 2014, than in the decade before. Labour-force participation is a paltry 40-50%, and only 10-24% for women. Subsidies are distorting the economy. A semiconductor plant in Gujarat will create 5,000 jobs directly and 15,000 indirectly. But a state handout covered 70% of its $2.7bn cost. Assuming rather generously that the factory would not have been built without government support, each job cost $100,000—nearly 40 times India’s average income per person.Grappling with the tension between India’s enormous potential and an often messy reality is the task of a new book by Raghuram Rajan, a former governor of the Reserve Bank of India, and Rohit Lamba of Pennsylvania State University. The pair sketch out a vision that amounts to an entirely new model of development for India—one that they argue is better suited to its strengths than its current model. Three lessons stand out from their work.The first is that India should stop fetishising manufacturing—an obsession born of East Asia’s growth miracle. In the 1960s India’s income per person was on a par with that of China and South Korea. By 1990 South Korea had taken off, while India remained level with China. Today China is three times richer and South Korea is seven times richer, adjusted for purchasing power. The growth of India’s rivals was driven by low-skilled manufacturing, which received plenty of state support. Globalisation created a vast market, leading to previously unheard of double-digit growth rates. Once workers and companies got good at the easy stuff, they began to tackle more complex tasks with their newfound skills. Why shouldn’t India follow its rivals’ example?As Messrs Rajan and Lamba explain, the problem is that East Asia has made manufacturing so competitive there is little profit left to be captured. Moreover, automation has reduced the number of available jobs—and manufacturing is no longer where value is to be found. Apple is worth $3trn because it designs, brands and distributes its products. By comparison, Foxconn, which actually makes Apple’s iPhones, is worth a mere $50bn.The second lesson concerns the export of services, which some in India’s government think is a fresh way to tap into global demand. Modern technology, especially the internet, has made services far more tradable. Remote work has accelerated this trend. Meanwhile, governments around the world are desperate to shore up domestic industries. Partly as a result, global trade in goods has declined over the past decade. Yet trade in services has continued to grow. It is hard to argue against seeking a slice of the cushiest part of the global value chain, especially when the line between services and manufacturing is blurring. Some 40% of the value-added in a Chevrolet Volt, for instance, comes from its software.In places, India is finding success. Its famed IT service sector has moved from mostly providing back-office work to more complex front-office fare. According to one estimate, 20% of the global chip-design workforce can already be found in the country. But profound reforms will be required if India is to succeed more broadly. Spending on education as a share of GDP is 3-4%—middling relative to others of similar income. The bigger problem is that India appears to get little bang for its buck. By the latter half of high school, around half of students have dropped out. Bosses report that many of those who graduate are still not ready for work. Getting a new business off the ground is such a nightmare that many startups incorporate in Singapore. Labour laws make workers difficult to sack once they have been employed for more than a year, which incentivises the use of intermittent contracts. France and Italy have global brands, point out Messrs Rajan and Lamba. India does not. It is these sorts of problems that help explain why.The last big item on the authors’ wishlist is liberalism—of both the economic and political varieties. Politicians should start, they write, by jettisoning protectionism. From 1991, when India opened up to global markets, to 2014, when Mr Modi took power, average tariff levels fell from 125% to 13%. They have since risen to 18%, raising the cost of intermediate inputs for producers. India has refused to join regional free-trade agreements, which inhibits the ability of its exporters to reach customers abroad. And Mr Modi’s authoritarian tendencies make it difficult for business leaders to criticise the government when a change of tack is required.Hear the roarMessrs Rajan and Lamba paint a lovely picture of what could be. A better governed, more open India would be wonderful. But whether their ambitions are politically feasible is another question. For example, better public services probably mean devolving power from the central and state governments to localities. And who wants to give up power? Certainly not Mr Modi; probably not his rivals. Moreover, a country can endure quite a lot of illiberalism before growth starts to falter. Until recently, China was humming along just fine. The Asian tigers only became more politically free when they were rich. India’s economy is already growing at north of 6% a year with a policy mix that is far from the perfect.In a strange way, though, this ought to provide Indian reformers with encouragement. Even if only half of what would be ideal is feasible, India’s boom may only just be getting started. ■Read more from Free exchange, our column on economics:At last, a convincing explanation for America’s drug-death crisis (Dec 7th)Why economists are at war over inequality (Nov 30th)How to save China’s economy (Nov 23rd)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More

The British lender’s asset management division said tight monetary and credit conditions have created a “problem of interest” for global economies, increasing the risk of an adverse growth shock next year that markets “may not be fully prepared for.”
HSBC AM believes global markets are heading towards a “new paradigm,” in which interest rates remain at around 3% and bond yields around 4%, driven by three major factors.

The HSBC Holdings Plc headquarters building in Hong Kong, China.
Paul Yeung | Bloomberg | Getty Images

LONDON — Markets have entered a “new paradigm” as the global order fragments, while heightened recession risk means that “bonds are back,” according to HSBC Asset Management.
In its 2024 investment outlook, seen by CNBC, the British lender’s asset management division said that tight monetary and credit conditions have created a “problem of interest” for global economies, increasing the risk of an adverse growth shock next year that markets “may not be fully prepared for.”

HSBC Asset Management expects U.S. inflation to fall to the Federal Reserve’s 2% target in late 2024 or in early 2025, with the headline consumer price index figures of other major economies also set to drop to central banks’ targets over the course of next year.
The bank’s analysts expect the Fed to begin cutting rates in the second quarter of 2024 and to trim by more than the 100 basis points priced in by markets over the remainder of the year. They also anticipate that the European Central Bank will follow the Fed, and that the Bank of England will kickstart a cutting cycle but will lag behind its peers.
“Nevertheless, headwinds are beginning to build. We believe further disinflation is likely to come at the price of rising unemployment, while depleting consumer savings, tighter credit conditions, and weak labour market conditions could point to a possible recession in 2024,” Global Chief Strategist Joseph Little said in the report.
A new paradigm
The rapid tightening of monetary policy by central banks over the last two years, Little suggested, is leading global markets towards a “new paradigm” in which interest rates remain at around 3% and bond yields stick around 4%, driven by three major factors.
Firstly, a “multi-polar world” and an “increasingly fragmented global order” are leading to the “end of hyper-globalisation,” Little said. Secondly, fiscal policy will continue to be more active, fueled by shifting political priorities in the “age of populism,” environmental concerns and high levels of inequality. Thirdly, economic policy is increasingly geared towards climate change and the transition to net-zero carbon emissions.

“Against this backdrop, we anticipate greater supply side volatility, structurally higher inflation, and higher-for-longer interest rates,” Little said.
“Meanwhile, economic downturns are likely to become more frequent as higher inflation restricts the ability of central banks to stimulate economies.”
Over the next 12 to 18 months, HSBC AM expects investors to place greater scrutiny on corporate profits and the ongoing debate over the “neutral” rate of interest, along with a heightened focus on labor market and productivity trends.
‘Bonds are back’
Markets are now largely pricing a “soft landing” scenario, in which major central banks return inflation to target without tipping their respective economies into recession.
HSBC AM believes the increased risk of recession is being overlooked and is positioning for defensive growth alongside a prevailing view that “bonds are back.”
“A weaker global economy and slowing inflation are likely to present a supportive environment for government bonds and challenging conditions for equities,” Little said.
“Therefore, we see selective opportunities in parts of global fixed income, including the U.S. Treasury curve, parts of core European bond markets, investment grade credits, and securitised credits.”
HSBC AM is cautious on U.S. stocks, due to high earnings growth expectations for 2024 and a stretched market multiple — the level at which shares trade versus their expected average earnings — relative to government bond markets. The report analysis sees European stocks as relatively cheap on a global basis, which limits downside unless a recession materializes.
“Japanese stocks may be an outperformer among developed markets, in our view, due to attractive valuations, the end of unconventional monetary policy, and a high-pressure economy in Japan,” Little said.

He added that idiosyncratic trends in emerging markets also warrant a selective approach rooted in corporate fundamentals, earnings visibility and risk-adjusted rewards. If the Fed cuts rates significantly in the second half of 2024 as the market expects, Indian and Mexican bonds and Chinese A-share stocks — domestic shares that are dominated in yuan and traded on the Shanghai and Shenzhen exchanges — would be some of HSBC AM’s top emerging market picks.
India’s post-pandemic rebound and rapidly growing markets and Japan’s continued exit from unconventional monetary policy render them as attractive sources of diversification, Little suggested, while Chinese growth is widely projected at around 5% this year and 4.5% in 2024, but could also benefit from further fiscal policy support.
“Asian equities are in a stronger position in terms of growth and are likely to remain a relative bright spot in the global context,” Little said.
“Regional valuations are generally attractive, foreign investor positioning remains light, while stabilising earnings should be the key driver of returns next year.”
Asian credit should also enjoy a much better year as global rates peak, most regional economies perform well and Beijing offers an additional fiscal boost, he added. More

The Federal Reserve on Wednesday held its key interest rate steady for the third straight time and set the table for multiple cuts to come in 2024 and beyond.
With the inflation rate easing and the economy holding in, policymakers on the Federal Open Market Committee voted unanimously to keep the benchmark overnight borrowing rate in a targeted range between 5.25%-5.5%. 

Along with the decision to stay on hold, committee members penciled in at least three rate cuts in 2024, assuming quarter percentage point increments. That’s less than market pricing of four, but more aggressive than what officials had previously indicated. 
Markets had widely anticipated the decision to stay put, which could end a cycle that has seen 11 hikes, pushing the fed funds rate to its highest level in more than 22 years. There was uncertainty, though, about how ambitious the FOMC might be regarding policy easing. Following the release of the decision, the Dow Jones Industrial Average jumped more than 400 points, surpassing 37,000 for the first time.

The committee’s “dot plot” of individual members’ expectations indicates another four cuts in 2025, or a full percentage point. Three more reductions in 2026 would take the fed funds rate down to between 2%-2.25%, close to the long-run outlook, though there was considerable dispersion in the estimates for the final two years. 
Markets, though, followed up the meeting and Chair Jerome Powell’s press conference by pricing in an even more aggressive rate-cut path, anticipating 1.5 percentage points in reductions next year, double the FOMC’s indicated pace.
In a possible nod that hikes are over, the statement said that the committee would take multiple factors into account for “any” more policy tightening, a word that had not appeared previously. 

“While the weather is still cold outside, the Fed has suggested a potential thawing of frozen high interest rates over the next few months,” said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.
Along with the interest rate hikes, the Fed has been allowing up to $95 billion a month in proceeds from maturing bonds to roll off its balance sheet. That process has continued, and there has been no indication the Fed is willing to curtail that portion of policy tightening. 

Inflation ‘eased over the past year’

The developments come amid a brightening picture for inflation that had spiked to a 40-year high in mid-2022. 
“Inflation has eased from its highs, and this has come without a significant increase in unemployment. That’s very good news,” Chair Jerome Powell said during a news conference.
That echoed new language in the post-meeting statement. The committee added the qualifier that inflation has “eased over the past year” while maintaining its description of prices as “elevated.” Fed officials see core inflation falling to 3.2% in 2023 and 2.4% in 2024, then to 2.2% in 2025. Finally, it gets back to the 2% target in 2026.
Economic data released this week showed both consumer and wholesale prices were little changed in November. By some measures, though, the Fed is nearing its 2% inflation target. Bank of America’s calculations indicate that the Fed’s preferred inflation gauge will be around 3.1% year over year in November, and actually could hit a 2% six-month annualized rate, meeting the central bank’s goal. 

The statement also noted that the economy “has slowed,” after saying in November that activity had “expanded at a strong pace.” 
In the news conference, Powell said: “Recent indicators suggest that growth in economic activity has slowed substantially from the outsized pace seen in the third quarter. Even so, GDP is on track to expand around 2.5% for the year as a whole.”
Committee members upgraded gross domestic product to grow at a 2.6% annualized pace in 2023, a half percentage point increase from the last update in September. Officials see GDP at 1.4% in 2024, roughly unchanged from the previous outlook. Projections for the unemployment rate were largely unchanged, at 3.8% in 2023 and rising to 4.1% in subsequent years.  
Officials have stressed their willingness to hike rates again if inflation flares up. However, most have said they can be patient now as they watch the impact the previous policy tightening moves are having on the U.S. economy.  
Stubbornly high prices have exacted a political toll on President Joe Biden, whose approval rating has suffered in large part because of negative sentiment on how he has handled the economy. There had been some speculation that the Fed could be reluctant to make any dramatic policy actions during a presidential election year, which looms large in 2024. 
However, with real rates, or the difference between the fed funds rate and inflation, running high, the Fed would be more likely to act if the inflation data continues to cooperate. More

Jeffrey Gundlach speaking at the 2019 SOHN Conference in New York on May 6, 2019.
Adam Jeffery | CNBC

DoubleLine Capital CEO Jeffrey Gundlach said Wednesday the 10-year Treasury yield will continue to fall to the 3% range next year, following the Federal Reserve’s new forecast for rate cuts.
“I think we’re still going to have bonds rallying,” Gundlach said on CNBC’s “Closing Bell.” “I would guess that we will see the 10-year Treasury yield in the low threes sometime next year.”

The benchmark rate hit a low of 4.015%, the lowest level since August, after the Fed held rates steady for a third consecutive meeting and set the stage for three interest rate reductions in 2024.
The yield, a benchmark for mortgage rates and other consumer loans, had topped the key 5% level in October for the first time since 2007. Yields and prices move in opposite directions to one another.
“There’s something about if you break below four on the 10-year that I think it almost sounds like a fire alarm going off relative to the economy,” Gundlach said.
Projections released by the Fed showed the central bank would slash rates to a median 4.6% by the end of 2024, which would equate to three quarter-point reductions from the current targeted range between 5.25% and 5.5%. 
Gundlach believes it’s unlikely that the central bank would reduce borrowing cost by that much next year.

“They’re just going to cut by three quarters of a percentage point or so says the Fed. I mean, I think that’s pretty unlikely,” Gundlach said. “I think that if they cut rates that much, they’ll have to cut them more than that.”Don’t miss these stories from CNBC PRO: More

The central bank also predicted that the core personal consumption expenditures price index will decline to 2.2% by 2025 and finally reach its 2% target in 2026.
These new forecasts suggest a softer inflation picture in the next two years than that from the last update in September.

Federal Reserve Board Chairman Jerome Powell answers a question during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, November 1, 2023.
Kevin Lamarque | Reuters

The Federal Reserve dialed back its inflation projections on Wednesday, seeing its favorite gauge falling to 2.4% in 2024.
The central bank also predicted that the core personal consumption expenditures price index will decline to 2.2% by 2025 and finally reach its 2% target in 2026. The gauge rose 3.5% in October on a year-over-year basis.

These new forecasts suggest a softer inflation picture in the next two years than that from the last update in September. The Fed had foreseen the core PCE hitting 2.6% in 2024 and 2.3% in 2025.
In the post-meeting statement released Wednesday, the Federal Open Market Committee said inflation has “eased over the past year” while maintaining its description of prices as “elevated.” 
While the public more closely watches the consumer price index as an inflation measure, the Fed prefers the core PCE reading. The former measure primarily looks at what goods and services cost, while the latter focuses on what people actually spend, adjusting for consumer behavior when prices fluctuate. Core CPI was at 4% in November while headline was at 3.1%.
Committee members also upgraded their forecast for gross domestic product. They now expect GDP to grow at a 2.6% annualized pace in 2023, a half percentage point increase from the last update in September.
Officials see GDP at 1.4% in 2024, roughly unchanged from the previous outlook. Projections for the unemployment rate were largely unchanged, at 3.8% in 2023 and rising to 4.1% in subsequent years.  

Dot plot
Projections released by the Fed showed the central bank would slash rates to a median 4.6% by the end of 2024, which would be three quarter-point reductions from the current targeted range between 5.25%-5.5%. 
The individual members of the FOMC indicate their expectations for rates in the following years in the “dot plot.”
Here are the Fed’s latest targets:

Arrows pointing outwards

Don’t miss these stories from CNBC PRO: More

This is a comparison of Wednesday’s Federal Open Market Committee statement with the one issued after the Fed’s previous policymaking meeting.
Text removed from the October-November meeting statement is in red with a horizontal line through the middle.

Text appearing for the first time in the new statement is in red and underlined.
Black text appears in both statements.

Arrows pointing outwards More

The market is pricing an almost 100% chance of a hold on Thursday, according to LSEG, with economic data since the Bank’s last meeting largely inconclusive.
Real GDP was flat in the third quarter, in line with the Monetary Policy Committee’s projections, while both inflation and wage growth have undershot expectations and domestic demand has been weak.
Barclays expects the MPC to deliver a split vote in favor of a hold, but keep its rhetoric hawkish as it pushes back against the market’s pricing of “premature” cuts.

A passageway near the Bank of England (BOE) in the City of London, U.K., on Thursday, March 18, 2021.
Hollie Adams | Bloomberg | Getty Images

LONDON — The Bank of England is all but certain to keep its main interest rate unchanged at 5.25% for a third consecutive meeting on Thursday, but economists are split over when to expect the first cut next year.
The market is pricing an almost 100% chance of a hold on Thursday, according to LSEG, with economic data since the Bank’s last meeting proving largely inconclusive.

Real GDP was flat in the third quarter, in line with the Monetary Policy Committee’s projections, while both inflation and wage growth have undershot expectations and domestic demand has been weak. U.K. headline inflation fell to an annual 4.6% in October, its lowest in two years.
The latest labor market data on Tuesday indicated a continuation of recent trends, with unemployment remaining broadly flat and vacancies continuing to decline at pace.
“This fits the hypothesis of some U.S. Federal Reserve officials that, with vacancies so high, it may be possible to introduce slack into the labour market without significantly raising unemployment,” PwC Economist Jake Finney said in an email Tuesday.
Average pay including bonuses fell by 1.6% between September and October, versus an average monthly growth rate of 1.1% in the first half of the year.

Finney noted that real inflation-adjusted wages are still growing on a year-on-year basis due to a steep fall in headline inflation, suggesting the worst of the country’s cost of living crisis is behind the average household.

Signs of the labor market cooling will offer some reassurance to the MPC ahead of Thursday’s meeting, Finney said, especially given the lack of major surprises in the economic data over the past month.
U.K. GDP shrank by 0.3% in October, new figures showed Wednesday, well below the flat reading expected by economists polled by Reuters and erasing the 0.2% growth recorded in September.
Multiple analysts suggested subsequently that the negative growth figures would cement Thursday’s expected hold on rates, but could increase the likelihood of cuts sooner in 2024 as the Bank looks to avoid tipping the economy into recession.
Rhetoric to remain hawkish
In light of this, Barclays expects the MPC to deliver a split vote in favor of a hold, but keep its rhetoric hawkish as it pushes back against the market’s pricing of “premature” cuts. Barclays does not expect rates to fall until August 2024.
Economists at the bank, Abbas Khan and Jack Meaning, said they expect the MPC to continue to indicate that its current monetary policy stance is “restrictive,” with growing signs of its impact on activity and the labor market.
“An unchanged forward guidance will also serve the MPC well to push against the current market pricing of Bank Rate which assigns an increasing probability to cuts in H1 2024,” they said.

“We continue to expect the beginning of the cutting cycle in August 2024 and a terminal Bank Rate at 3.25% by Q2 2025.”
Khan and Meaning added that a repricing of the timing and magnitude of cuts by the U.S. Federal Reserve and the European Central Bank, both of which will also announce policy decisions this week, may exert pressure on the MPC to start cutting the Bank rate earlier if sterling was to spike and cause inflation to fall below the Bank’s 2% target sooner or by a greater margin.
“However, given the timing of data cycles, the level of inflation, in particular in services, and the y/y rate of wage growth, we think it is unlikely that the MPC will pivot in H1 2024 and almost certainly not before May,” they added.
No change in narrative
Both the Fed and the ECB have seen their hawkish stances tempered by dovish interventions from pivotal voting committee members — Christopher Waller in the U.S. and Isabel Schnabel in Europe.
By contrast, the Bank of England’s centrist policymakers, such as Governor Andrew Bailey and Chief Economist Huw Pill, have repeatedly emphasized that it is too soon to talk about cuts, while more hawkish members have raised further concerns about the potential persistence of inflationary pressures.
“While current market pricing is not too far away from our Bank Rate forecast — first cut in June and 100bp of cuts over 2024 — at this stage we think that the BoE will want to prevent financial conditions loosening too much, too soon,” BNP Paribas European economists Paul Hollingsworth and Matthew Swannell said in a research note last week.
The French bank expects the Bank of England to reiterate the need to remain in restrictive territory on Thursday, though as there will be no press conference or updated projections, this will need to be conveyed through the vote split, guidance and any post-meeting communications.
“Ultimately, however, we expect both growth and inflation to be weaker than the BoE forecasts for H1 2024, bringing a first cut in June 2024 and taking Bank Rate to 4.25% by the end of the year,” Hollingsworth and Swannell added. More