What to look out for in stock markets in 2024?
From the DJE Kapital AG strategy team
DJE's strategy team continuously monitors and evaluates the markets using its proprietary FMM methodology based on fundamental, monetary and market technology indicators.
It was an euphoric end for stock markets in 2023. Most of the major stock market indices, including the S&P 500, the Nasdaq, the Stoxx Europe 600 and the Japanese TOPIX, ended the year with a significant gain. This was in stark contrast to the prevailing expectations at the beginning of the year when market participants expected a difficult year due to the Federal Reserve’s policy of rising interest rates.
Weaker economic outlook
The positive momentum could continue at the start of 2024, but we believe the market consensus is currently overly optimistic and we are cautious about the assumption of a "soft landing" for the US economy. Although we are not expecting a massive slump in the market, we are preparing for a cooling of the economy.
One reason for this is that the effects of high interest rates on the economy are yet to materialise: higher financing costs and presumably weaker customer demand could weigh on corporate profits. We are cautious about equities that are heavily dependent on German or European domestic consumption. The risk of a recession in the USA is also not yet over. In the past, equity markets in the US, but also worldwide, have only reacted positively to falling interest rates if there was no recession. The German economy is likely to remain under pressure in 2024; however, the German stock market could also outperform the German economy in the future. When looking at the companies in the DAX, then the earnings yield relative to the yield on 10-year German government bonds doesn’t indicate an overvaluation of the index.
Inflation has peaked in the USA and Europe. Due to the fastest interest rate hikes in history, the Fed and the ECB have brought inflation under control. The core rates from a short-term perspective are now only 2% in Europe and 3% in the USA. However, the issue of inflation-related losses in consumer purchasing power (second-round effects due to high wage demands) is still ongoing. These effects will persist for some time to come.
There are a lot of elections in 2024, which will likely cast uncertainty on the markets this year. The election in the US will be particularly important. Historically, election years tend to a sideways market move until May.
We focus on companies with business models that are less exposed to the economic development and that have high margins and ideally cost-cutting potential. In terms of sectors, the insurance sector remains interesting. There is relatively good visibility in terms of profit growth and these companies benefit from the higher interest rates compared to recent years. In the past, pharmaceutical/healthcare stocks, consumer staples (non-cyclical consumer staples) and utilities have also been among the best performers during periods of lower interest rates.
In 2023, the stock market benefited from the hype around artificial intelligence (AI) and we continue to see tailwinds for companies in this area. Top technology companies will continue to invest heavily in AI.
We are less optimistic about cyclical sectors such as the automotive industry.
Opportunities & risks in Asia and other emerging market regions
The Chinese stock market looks back on a difficult year and we don’t expect a major economic recovery for the time being. China is facing major structural change and is therefore failing as an economic engine for the global economy. Property prices are also expected to remain under pressure in 2024. However, there are interesting companies in some sectors, e.g. electromobility, semiconductors and financial services, which means that good stock picking remains essential.
The economic outlook for Japan remains good. Companies are benefiting from low interest rates and the relatively weak yen. In addition, Japanese companies are generally becoming more efficient and transparent. The so-called "friendshoring" also favours Japan as a production location. If the yen were to rise in the coming months, this would be positive for some companies, particularly in the financial sector.
Mexico is another strong beneficiary of the shift in global supply chains and US friendshoring. Investments are continuing to rise sharply, and the Mexican economy is also expected to develop positively in 2024.
2024 could be a good year for bonds
After more than 10 interest rate hikes by the most important central banks, interest rates appear to have peaked and 2024 could therefore be an interesting year for bonds. Many market participants are already expecting interest rate cuts in the first half of the year, as inflation has fallen noticeably in both Europe and the US. In view of the still relatively good economic development in the US, we believe that expectations of up to 6 interest rate cuts in the US in 2024 are too high. In the short term, the price potential on the bond market could be somewhat exhausted, but the risk/reward ratio for bonds remains promising in the medium term. Bonds have generally benefited from falling interest rates in the past and are currently valued at an attractive level, particularly when comparing the earnings yield on the US equity market relative to the yield on 10-year US government bonds.
We currently prefer investment grade bonds. Longer-dated government bonds are also attractive. We remain cautious in the high-yield segment due to the expected economic slowdown.
Bright prospects for gold?
The price of gold also remains interesting. At the beginning of December, the gold price reached a new all-time high of well over USD 2,000 per ounce. The expectation that interest rates will be lowered over the course of 2024 is supporting the gold price. Historically, the gold price has often risen after US interest rate pauses. Global gold ETF holdings fell sharply in 2023, which suggests that many investors are not currently overinvested in gold, which is also positive for the gold price.
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