International Outlook 2024

• In our 2024 International Asset Allocation Outlook, bonds emerge as a prominent asset class. The macroeconomic outlook suggests that bonds and stocks will regain their inverse relationship.
• Current valuations and levels could strongly favor fixed income: While not a perfect indicator, starting levels of bond yields give us clues about future returns. The yield levels currently offered by high quality fixed income have been followed by higher returns over the longer term (typically an attractive 5%-7.5% over the subsequent five years).
• In equities, EPS over the next year is estimated at 11%, which we believe is unusually high for an economy facing a potential slowdown. Over the past 20 years, S&P 500 valuations have averaged a 12-month P/E of 15.4 times. Currently, that valuation multiple is much higher (12-month P/E of 18.1 times).
• However, we note a crucial differentiation within the equity market: if we exclude the seven largest tech companies from this calculation, the rest of the S&P trades near the long-term average, at a 12-month P/E of 15.6 times. This differentiation could present attractive opportunities to generate alpha through active management.
• We recommend a more balanced overall exposure. Valuations outside the U.S. also look more attractive.

• It is likely that the dollar will tend to weaken in a context of a more moderate Federal Reserve. 

Local Outlook 2024

Local assets continue to offer an attractive risk/return ratio

• Economically, next year should be a year of transit. After having made most of the macro adjustment during 2023, we should see a growth dynamic close to potential, although below it. Inflation will continue to decelerate and the TPM should converge by the end of the year and beginning of 2025 to its neutral level.
• We assume that this closes the constitutional process and political volatility should be reduced in 2024. Regardless of the outcome of the referendum, there was broad political consensus that the attempt to draft a new constitution will not continue. This should allow for significantly less activity on the electoral front in 2024, with the October 2024 municipal elections being the main event to monitor.
• At the local level, the beginning of the monetary easing cycle will accelerate the transition of portfolios from IIF to IRF. Corporate bonds historically perform better in down cycles of TPM than money market instruments or government bonds. Therefore, gradually moving away from time deposits and money market funds and starting to favor fixed income between 2 and 3 years duration with a preference for well rated bank and corporate bonds is a first move to consider.
• The expectation of aggressive monetary easing going forward should also be a catalyst for local equities. Inflation will continue its deceleration and the TPM should converge by the end of the year and beginning of 2025 to its neutral level, which would allow decompressing the punished equity valuations of the LTV. To this we can add an improvement in corporate earnings next year and a friendlier institutional political environment, particularly after the closing of the constitutional process.
• Regarding the exchange rate, we expect some depreciation from current levels. Our models continue to show an undervalued peso, although we must also recognize that it has become "more fragile" and speculative and the "negative carry" vis-à-vis comparables should continue to weigh.

For more information, we invite you to see the attached report .

Humberto Mora

Assistant Investment Manager Finance and Business Finance and Business Brokerage Firm