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Market expectations of Fed cuts 'overdone,' volatility to jump in 2024, BlackRock says

FILE PHOTO: The Federal Reserve building is seen in Washington, DC

By David Randall

NEW YORK (Reuters) -Global markets will experience greater volatility in 2024 as the Federal Reserve cuts benchmark interest rates fewer times than many investors are pricing in, strategists at the BlackRock Investment Institute said at a panel discussion on Tuesday.

Nevertheless, BlackRock, the world's largest asset manager, continues to see opportunities in equities in AI stocks and technology, particularly in the memory sector, with opportunities also due to so-called quality factors such as stable earnings and high margins. The firm has a slight underweight to U.S. equities as a whole, though remains favorable on sectors such as industrials and health care.

"Market pricing for rate cuts is a bit overdone in our view," said Wei Li, global chief investment strategist for BlackRock. "Rate volatility is here to stay."

Markets are currently pricing in a greater than 50% chance that benchmark rates will fall more than 125 basis points by next December, according to CME's FedWatch Tool. Benchmark 10-year Treasury yields have fallen more than 80 basis points over the last month after signs of cooling inflation and weakness in the labor market, fueling a rebound in U.S. stocks that saw the S&P 500 crest a 2023 closing high last week. The index is up nearly 19% year-to-date.

In 2024, shifting assumptions about interest rates will likely lead to a "windshield wiper market,” in which different sectors fall in and out of favor rapidly, said Tony DeSpirito, global chief investment officer of fundamental equities. He is particularly bullish on memory storage companies, which he believes will play a key role in the growth of AI capability.

“You are buying into memory at the bottom of a cycle that has the potential to be a super cycle," he said.

The firm remains bullish on short-term Treasuries, but cautioned it sees structurally higher inflation that will make it difficult for longer-duration bond yields to fall significantly from current levels. Instead, investors should prepare to reap more returns from yield than from appreciation, the firm said.

"Income is back in a meaningful way for investing for next year," Li said.

Among emerging markets, the firm said it is bullish on India and Mexico, and has a broad preference for emerging market assets over those in developed markets.

While markets may be expecting too much in the way of Fed cuts, the central bank has likely already hit peak rates, making fixed income more attractive overall, said Kristy Akullian, senior investment strategist at the firm.

The "greatest risk is holding too much cash," she said.

(Reporting by David Randall, Editing by Nick Zieminski, Ira Iosebashvili and Chris Reese)

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