In 2024 probably characterized by a moderate economic growththe performance of Quality titles should be above average. Stock returns will be less brilliant, but bonds will do better. The status of the United States as the leading power on global stock markets will fade, while, for once, European stocks will surprise positively. At the same time, emerging market (EM) economies will surpass those of developed countries. This, in summary, is the picture drawn by the Strategy Unit of Pictet Asset Management in the report “The investment landscape in 2024”.
The economic scenario
There economic growth will slow and so will inflation, but not as much as hoped. Pictet expects inflation in developed economies to fall to 3% in 2024 (from 4.7% in 2023). There Bank of England will presumably be first of the large central banks to cut i rates, while the US Federal Reserve will be more cautious in starting the cuts compared to what is currently expected by the market, but two more cuts are expected in the second half of the year and the same for the European Central Bank.
After the 1.5% expansion in 2023, we expect a growth of 0.8%, with a slowdown in that of the United States from 2.4% to 0.9%. Emerging market economies are expected to see solid growth of 3.9% in 2024, compared to 3.7% in 2023 and 2.8% a year earlier. This will likely be supported by a recovery in China from this year’s lows.
There is a significant probability that, in the eagerness to bring inflation back to target, the central banks exaggerate with monetary policy tighteningtriggering a recessiona risk that Pictet experts estimate to the 25th%. Alternatively, according to analysts, there is a probability of 15% stagflation (new acceleration of inflation even with a slowdown in the economy), especially in the event of an energy shock triggered by global events.
And then there are the geopolitical risks. Regional critical issues are multiplying. There are no signs of a solution to the Russia-Ukraine war. The conflict between Israel and Hamas in Gaza threatens to widen.
Stock trend: the rebirth of Europe
In short, 2024 will be a year for investors positive year to return to focusing on national and sectoral fundamentals, adopt a scrupulous approach, focus on quality titles and creditsoverweighting sovereign bonds.
The global stocks they are on track to generate good, if not spectacular, returns in 2024. After falling behind the United States in the final months of 2023, now the Europe’s moment seems to have arrived. The reduction in global growth margins should also lead defensive sectors to perform better than more cyclical growth stocks.
Pictet Asset Management plans a global earnings growth of around 4% for next year, 6% less than analysts’ estimates. The gap between market earnings expectations and projections is more pronounced in the United States, where a slowdown in economic growth is expected due to the still unanticipated effect of the rise in interest rates.
Europe, on the other hand, should do better. Here, earnings expectations are much lower and leave less room for disappointment. Bearish investor sentiment should gradually improve as the economy recovers: as manufacturing recovers, analysts expect eurozone GDP growth to increase to 0.7% in 2024, in line with US growth (relative to -2% of 2023). The reasons for investing in Europe become even more valid when you consider valuations and positioning. Exchanges in the Old Continent take place with a forward price-to-earnings ratio over 12 months equal to 12 timescompared to 19 times in the United States.
Fixed income and currencies
THE global bond markets they have never sustained such a prolonged period of volatility as in the last two years. But analysts say the end of what some have called “the greatest bond bear market of all time” is coming, as the outlook for both developed and emerging bond markets finally brightens.
Global fixed income markets are likely to produce this year above-average profits, thanks to higher coupon income, weak nominal growth in the global economy and a gradual shift away from central banks’ aggressive monetary tightening policies. Government bond yields in major economies are likely to fall by around 50 basis points on average.
Pictet Asset Management expects that i US Treasury yields reference 10 years will end the year at 4%, which should bring the total return of global bonds (measured on the JP Morgan Global Aggregate Bond index) to around 7% in 2024. From Italy to the United States, from the United Kingdom to Canada, investors in bonds in the coming year Developed economies can ensure attractive capital returns post-inflation. In the United States, i Inflation-protected Treasury bonds (TIPS) appear particularly interesting should inflation remain high also due to conflicts in the Middle East.
However, it is probable that i Japanese and Swiss bond markets ignore the positive trend. Both are in fact low-yield markets, where the post-inflation annualized return prospects (i.e. real returns) are negative. Investors should avoid Japanese government bonds in particular, as the Bank of Japan appears poised to normalize its monetary policy, ending negative interest rates, and then increase short-term borrowing costs during 2024.
Foreign exchange market: the decline of the dollar
As for the foreign exchange markets – according to Pictet Asset Management – the dollar will begin a period of slow but prolonged decline. The currency’s yield advantage over developed market counterparts will disappear as U.S. GDP growth falls below that of most other developed economies during 2024. For this year the dollar is expected to fall by at least 5% against the basket of the main currencies of reference.
The yen should benefit the most by the weakness of the dollar. Its real effective exchange rate is more than 20% below its 10-year average, while, on a purchasing power parity basis, the Japanese currency is about 40% below its fair value. The decline in US-Japan yield spreads in favor of the yen should help narrow this valuation gap next year.
Also the attractiveness of gold investments is growing. The decline in US real rates and the weakening of the dollar should be favorable to the precious metal, although its valuation is no longer so attractive after the almost 10% rise in 2023, especially following the conflict between Israel and Hamas.