Chief Investment Strategist
Summary: The outlook for global equities in 2024 is uncertain, with both optimists and pessimists holding strong views. The optimists believe that the US economy is on a solid footing, inflation is slowly coming down, and the consumer is not dead. They also believe that generative AI has the potential to significantly boost economic growth and remain overweight cyclical sectors in the equity market. The pessimists, on the other hand, believe that the US government's fiscal stimulus is unsustainable, Europe is already in a recession, China is slowing down, and consumers are running out of savings. They also worry about geopolitical risks, refinancing of debt, earnings expectations, and inflation surprises. As a result, they recommend overweighting defensive sectors such as energy, utilities, consumer staples, and health care, and long volatility through puts on technology stocks.
Everything in financial markets and the global economy have been unusual since the pandemic broke out in 2020 ushering extraordinary policy moves, supply chain chocks never seen before, and the first full scale conventional war on the European continent since WWII. With sticky inflation reappearing like a bad horror movie from the 1970s central banks slammed the brakes on financial conditions launching in 2022 the most aggressive policy rate cycle since 1971.
The Fed’s move was a time bomb waiting to explode but the Biden administration’s aggressive fiscal moves in 2022 offset the pain from the Fed policy hikes and the extended period of low interest rates had also locked in households and corporates at very low interest rates. In effect long lags were operating in the economy and did not slip into a recession in 2023 as expected. As long lags from monetary and fiscal policies are still working their way through the economy the visibility and understanding of the underlying dynamics are very difficult to get right for investors and traders. We are in a situation where investors can pick and choose whatever indicator they want to support their outlook for 2024.
Below we have set up the case for the optimist and the pessimist highlighting the factors that support each views.
After having dodged the recession bullet in 2023 and inflation slowly coming down, the optimist feels the outlook is more stable and less worried about the AI hype and boom in technology stocks. What are some of the key factors that support a positive view on global equities in 2024?
How to position the portfolio?
The global luckily avoided a recession in 2023 although Europe could not escape it as the pain from higher energy prices and a weak Chinese economy became too much for the European economy. Equity markets went too far last year on the hopes of generative AI and the pain of higher interest rates will come to haunt consumers and companies in 2024. Below we list some of the factors that drive a pessimistic view on equities in 2024.
How to position the portfolio?
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
