Themis Themistocleous signals potential 2024 interest rate cut

In their "Year Ahead 2024" forecast, analysts at Swiss financial giant UBS anticipate a slowdown in the strength of the US economy throughout 2023. However, the forecast suggests that the US economy will still exhibit positive growth in the year 2024. UBS analysts project Europe to maintain sluggish growth, while China is expected to transition into a new normal characterized by slower but potentially higher-quality growth.

Speaking in an interview with K, Themis Themistocleous, the Global Head of UBS EMEA Investment Office, highlights a strong likelihood of interest rates starting to decline around mid-2024 in major regions. He emphasizes that the Eurozone has successfully averted the risk of recession for the year 2024.

Themistocleous, noting the centrality of banks to the economy, underscores their role in providing credit. He suggests that if banks struggle to offer credit, economic growth becomes considerably challenging.

- When do you anticipate the start of interest rate cuts in the Eurozone, and to what extent is this process expected to unfold in 2024?

- There is a substantial likelihood that interest rates will begin to decline around mid-2024 in most major regions. In Europe, the European Central Bank is likely to begin rate cuts in the second quarter of 2024. A similar move is anticipated from the United States. Regarding the Bank of England, they might also implement cuts around mid-2024 or possibly a bit earlier. Central banks consistently need to balance considerations between fiscal and monetary policies. If they observe increased spending on the fiscal side, it might lead to a delay in interest rate cuts. The European economy is not experiencing robust growth; in fact, it is exhibiting very weak growth for the current year, perhaps less than 0.5%. Central banks must exercise great caution in their actions to prevent a recession.

Cyprus' growth statistics appear promising, and the anticipated impact seems to be minimal. Despite having a small economy, Cyprus is open and benefits significantly from a thriving services sector and tourism industry. It stands out as one of the fastest-growing economies in Europe.

- Will the euro area manage to steer clear of a recession in 2024, or will a shift in monetary policy be necessary to restore growth to its previous trajectory?

- Currently, we are optimistic about this prospect, but a sense of realism is warranted given the forecasted growth of 0.5%. If you ask about the potential risks for the euro area, several factors come into play. A recession in the United States could pose a risk of dragging Europe into a similar economic downturn due to significant trade ties between the euro and the US. Simultaneously, a prolonged period of high ECB interest rates could contribute to a European recession. Geopolitical developments have the potential to impact confidence, thereby influencing changes related to commodity prices. However, it's important to note that such scenarios are not the norm.

As mentioned earlier, the European economy has pleasantly surprised observers as many anticipated a recession, which has not materialized. Similarly, the US has defied predictions of a recession, showcasing more resilience than initially expected. In summary, I believe Europe is steering clear of a recession, albeit with modest growth rather than robust expansion.

Investing

- In the annual UBS Year Ahead 2024 report, you mentioned that European growth will remain "sluggish." However, the question arises: How should we approach investments in 2024?

- We believe it is always wise to invest and maintain a focus on the investment environment, particularly in the context of the outlook for 2024. The most compelling area for investment appears to be fixed income, specifically bonds. If you anticipate a decline in interest rates, high-quality bonds, such as investment-grade bonds, tend to perform well. From our perspective, bonds seem more favorable than stocks, but we anticipate reasonable returns from both asset classes. Therefore, we identify opportunities across various asset classes. However, our preferred asset classes are high-quality bonds and high-quality equities. High-quality equities also demonstrate resilience in a slowdown or, to phrase it differently, in a recession. These are companies with robust balance sheets, resilient earnings, and impressive margins. Consequently, these companies are likely to outperform the broader economy.

Retraining opportunities

- How might the rise of AI herald an era of higher productivity, as discussed in the UBS Year Ahead 2024?

- The emergence of AI presents a significant opportunity for the economy. While its impact won't be immediate, substantial efficiencies can be achieved across various sectors. Consider the legal sector, for instance. Traditionally, cases were examined manually, but now we can develop programs to extract and present the necessary information. A similar approach can be applied in medicine, where a program can extract vital patient information. It is crucial to note that the final decision still requires a human touch, but AI can streamline the process. The need to search for information, summarize it, and draw conclusions can be delegated to computers, enhancing efficiency. Additionally, AI creates numerous opportunities for new forms of employment. People will be needed to train programs and develop new applications. While the adoption of AI may lead to some job losses, it also emphasizes the importance of retraining. 'AI' offers retraining opportunities, requiring the workforce to adapt to evolving job roles.

Whenever breakthrough technologies emerge, there is a shift where jobs in one sector become redundant, but new jobs in other sectors arise. This necessitates adaptation in the workforce to align with the changing job landscape.

- Can Cyprus attract significant investment, or is it definitively identified as a fiduciary destination, which excludes it from any real investment opportunities?

- Cyprus can indeed attract significant investment, but it must be emphasized that investors, whether in a country, business, or any other entity, seek a secure environment. This means operating without corruption and minimizing risks to their investments. Ratings agencies play a pivotal role, in examining aspects like corruption, the judicial system, and internal affairs when evaluating a country.

Taking both the past and future into consideration, it is encouraging that the Cypriot government has undertaken substantial efforts to enhance laws related to money laundering and corruption. Recognizing these improvements is crucial, and the focus now lies in sustaining this momentum. The government needs to convince stakeholders that it is committed to creating an ideal investment environment, free from concerns about corruption or similar issues.

They don't work in a positive manner

- Do you think the Cyprus Confidential revelations will play a negative role in future investments in Cyprus?

- While I am not privy to the details behind the Cyprus Confidential revelations, it is clear that they do not have a positive impact. Investors, rating agencies, and other stakeholders consider such data. However, the key lies in the government taking proactive steps to address the situation. Tangible actions are required to prevent the recurrence of bad practices and to weave together a trustworthy environment for investments in Cyprus. In essence, corrective action is imperative to rectify past issues and instill confidence in potential investors.

Technology companies

- Do you believe that Cyprus has the potential to play a key role in transforming Europe into a climate-neutral and digitally efficient economy?

- I am uncertain about whether being a small country can truly play a "key role" in influencing the entirety of Europe. We should avoid overestimating Cyprus's potential impact. While there has been notable progress over the years, I believe there is still a considerable distance to cover in terms of digitalization, especially within government functions. Bureaucracy, inflexibility, and the absence of digitization are still palpable. Addressing these challenges is essential. Moreover, Cyprus, despite its abundant sunlight and air, heavily depends on fossil fuels, indicating the need to shift the economy toward a greener model.

Returning to the topic of digitalization, what excites me about Cyprus is the proliferation of new businesses revolving around digital technology companies. Technology serves as the foundation and framework for entrepreneurs to initiate and conduct businesses beyond the borders of Cyprus, extending into the Middle East, Europe, and beyond. This not only enhances Cyprus's economic strength but also allows it to exert influence on other economies.

- Do you think Cyprus should draw as much money as it can from the Recovery and Resilience Fund?

- It is a tremendous opportunity for countries, especially major beneficiaries like Cyprus, Greece, and Italy, to leverage the benefits of the Recovery and Resilience Fund (RRF). Properly identifying and executing the right projects to absorb these funds represents a significant opportunity for governments. To maximize this potential, they must undertake the necessary reforms and investments. I firmly believe that countries supporting future growth will do so by making strategic use of the resources available through the RRF.

They can again

- One last question: What is your opinion on Cypriot banks?

- Banks play a crucial role in any country; they are the economic heartbeat. If they cannot provide credit, it becomes challenging for the economy to thrive. A robust financial cycle is essential to support economic growth. In countries like Greece and Cyprus, where the banking sector faced challenges during the European crisis, there was a need to rebuild their balance sheets to facilitate credit provision. Currently, they seem to have reached a point where they can resume lending and contribute to economic support. However, caution is necessary. Although non-performing loans (NPLs) have been reduced and downsized by selling them to credit buyout companies, they still impact the economy. Finding a comprehensive solution is imperative. In conclusion, it's crucial to emphasize that stronger banks have a greater capacity to support investments, fostering economic growth.

[This article was translated from its Greek original]