Benjamin Melman, chief investment officer at Paris-based Edmond de Rothschild Asset Management, shares his market analysis and outlook for 2024.

Since the end of October 2023, the MSCI world index, which tracks the performance of large and mid-cap firms in developed countries, has jumped more than 20 per cent and beat records, Benjamin Melman at Edmond de Rothschild Asset Management said on Friday.

“Fourth-quarter results were on the whole upbeat but they can hardly justify such extraordinary returns. We usually see such gains when the market is anticipating the end of a recession or during phases like the internet bubble in 1995 to 2000,” Melman continued.

“As we are not emerging from a recession, it is tempting to draw parallels between the artificial intelligence (AI) surge and the internet bubble,” he added. So are we in a bubble?

The AI craze and the internet bubble have one thing in common: massive earnings' growth expectations. But the difference today is that at least there is already some incipient earnings' momentum to justify the enthusiasm. The exuberance over certain stocks is also much more selective than before 2000.

Melman believes that the question now is when the US Federal Reserve will start cutting interest rates. The market’s upward move is also in part linked to the central bank pivot. The rate-cutting programme might be more measured than initially thought but a downward move would not seem to be in question. “So, although we cannot extrapolate this powerful market rally, it is certainly not a bubble,” he said.

Melman highlighted how the economic environment is good for risk assets. The US economy keeps showing surprising vigour and the chances of the labour market returning to more normal conditions are still good. The latest data even suggest business activity will soon start to normalise. Europe's economy seems to be flirting less with recession while China’s economy is growing less but is warding off a collapse thanks to budgetary tweaking. Central bank surveys of commercial banks call for a gradual easing of lending conditions. The main risk is a pick-up in inflation, he added. Liquidity will also be less abundant.

The US market's risk premium has fallen sharply, albeit to levels which are not particularly worrying, he continued. All it shows is that long-term outperformance of bond markets is likely to be below average but with no obvious short-term indications.

Melman is maintaining the firm’s neutral weighting on equity markets and is still overweight on fixed income. He has, however, reduced his exposure to US Treasuries as he thinks there is more risk of inflation picking up there than in Europe.

Other asset managers also favour fixed income. Chicago-headquartered Northern Trust is overweight in fixed income (neutral on investment-grade debt), overweight on high-yield paper, and underweight in global equities in developed countries. See more commentary here.