BNP's Pierri: Stocks Performance to Be Subdued in 2024

Well, first of all, thanks for having me. I would say the most frequent question is about inflation and unemployment. I think inflation is slowly coming down, and yesterday's numbers confirm that thesis. What's striking is the resilience of the labour market on both sides of the ocean. That gives us comfort that in 2024, markets will buy into a reversal of central bank tightening. Firms are cautious about layoffs because they learned from the pandemic that rehiring is tough. So unemployment and inflation are the tricky questions. The rally yesterday signals appetite for riskier assets as the outlook clears. However, central banks will likely wait for solid confirmation that inflation is under control before easing, so it may take longer than the market expects.

Structurally, one of the things we've been telling our clients is that we are living in a world of multiple transitions. Everyone focuses on the ecological and energy transition, but at the same time we are seeing a technological transition, a demographic transition, and a geopolitical transition. This is unprecedented in my career—all these big changes happening simultaneously. They are self-reinforcing but potentially contradictory. The medium-term implication is structurally lower global GDP growth and higher inflation. This is a paradigm shift from the last 20-25 years. It's a regime change that is difficult for the market to price because we normally look at the past. So that's exactly where we are right now. The cost of money and credit underpins everything.

If we are saying inflation will be structurally higher, say averaging 3%, then the floor for interest rates will be significantly higher than in the previous cycle. We probably won't see zero interest rates for some time. The speed at which rates have risen over the last two and a half years is what really hurts the economy, not necessarily the absolute level. We also had the governor of Banco de Portugal here, and he talked about European growth being data dependent. The data are good—inflation globally is falling, in the eurozone already below 3% for October. We must be patient, but we have the feeling that we are doing our job.

Look, as a business, we are also going through a significant transition. It's been a great business over the last ten years with top-line growth and margin expansion driven by structural forces. Only one third of European households have professionally managed savings, so growth continues. But market performance has been a driver, and with subdued equity returns expected next year, it will be more challenging. There will be cost pressures and top-line pressures. It's a reversal of the previous cycle. Crucially, we need to reestablish our role in reallocating capital from a policymaking perspective. For example, supporting energy transition requires increased retail participation in capital markets, which is still too low.

It has started going in the direction policymakers identified. Sustainable products have attracted more flows than others over the last few years. Private asset deals in sustainability are also going in the right direction. However, the challenge is huge—an additional three and a half trillion dollars per year is needed to support net-zero transition. So it's not enough; we are just at the beginning. There have been some performance pressures on sustainable products recently, but this is cyclical. We need to accelerate, especially in Europe, where renewable deployment is not consistent with a 1.5-degree pathway.

On the flip side, we will see a revival of fixed income. With rates where they are on both sides of the ocean, there are clear opportunities. Money has been flowing into fixed income since September. The value proposition is simple: you can lock in 4.5% to 5% for five years, which stabilises a portfolio. The 60/40 portfolio model from the last decade may be over, but the need for diversification remains. The key change is that base yields are higher, providing a buffer against bond price volatility. So bonds will again provide diversification and protection in a volatile environment.

We spend time on everything strategically significant. But it's early days for AI in our industry. We are focusing on efficiency and automation use cases. Data quality is key; we need to get our data set in order to leverage AI. At the same time, we are working on having the right product offer for a very different cycle.

Overall, European asset managers are doing well. They have benefited from the UCITS brand, which is recognised globally for its strong regulatory framework. The main structural difference from the US is that the US home market is the largest single market, giving economies of scale. Additionally, the US has the 401(k) tax incentive for long-term savings, which Europe lacks. However, Europe has great human capital and can compete with the largest players and will see growth.