Wishing all readers, a joyful holiday season and a happy new year.
J. P. Morgan: Too early for a victory lap
As we head into 2024, a combination of solid activity and falling inflation has seen the market narrative increasingly shift towards the prospects of a soft landing.
• We are a little more skeptical. Even though Western economies may be less rate-sensitive than in the past, we expect that the “long and variable lags” of monetary policy transmission are at least part of the better explanation for the economic resilience seen so far.
• We think it's too early for the central banks to declare outright victory over inflation, and anticipate that rate cuts in 2024 are unlikely to pre-empt economic weakness.
• We therefore think interest rates could be set to fall later than the market currently expects, but eventually they may also fall further than predicted.
• We believe investors should focus on locking in yields currently on offer in the bond market. Targeted alternatives could augment the role that bonds play as diversifiers against different risks. In equities, potential pressure on margins warrants a focus on quality and income.
Goldman Sachs: The Hard Part Is Over
The global economy has outperformed even our optimistic expectations in 2023. GDP growth is on track to beat consensus forecasts from a year ago by 1pp globally and 2pp in the US, while core inflation is down from 6% in 2022 to 3% sequentially across economies that saw a post-covid price surge.
• More disinflation is in store over the next year. Although the normalization in product and labor markets is now well advanced, its full disinflationary effect is still playing out, and core inflation should fall back to 2-2½% by end-2024.
• We continue to see only limited recession risk and reaffirm our 15% US recession probability. We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts if growth slows.
• Most major DM central banks are likely finished hiking, but under our baseline forecast for a strong global economy, rate cuts probably won’t arrive until 2024H2. When rates ultimately do settle, we expect central banks to leave policy rates above their current estimates of long-run sustainable levels.
• The Bank of Japan will likely start moving to exit yield curve control in the spring before formally exiting and raising rates in 2024H2, assuming inflation remains on track to exceed its 2% target. Near-term growth in China should benefit from further policy stimulus, but China’s multi-year slowdown will likely continue.
• The market outlook is complicated by compressed risk premia and markets that are quite well priced for our central case. We expect returns in rates, credit, equities, and commodities to exceed cash in 2024 under our baseline forecast.
• Each offers protection against a different tail risk, so a balanced asset mix should replace 2023’s cash focus, with a greater role for duration in portfolios.
• The transition to a higher interest rate environment has been bumpy, but investors now face the prospect of much better forward returns on fixed income assets. The big question is whether a return to the pre-GFC rate backdrop is an equilibrium. The answer is more likely to be yes in the US than elsewhere, especially in Europe where sovereign stress might reemerge. Without a clear challenger to the US growth story, the dollar is likely to remain strong.
Morgan Stanley: Threading the Needle
Investors face tough choices in an imperfect world but can look for opportunities in fixed income while remaining cautious on emerging markets and commodities.
Investors will need to make deliberate choices in 2024, paying close attention to monetary policy if they want to avoid a variety of potential pitfalls and find opportunities in an imperfect world of cooling but still-too-high inflation and slowing global growth.
Markets have already baked into asset prices the idea that central banks will manage a smooth transition to reduced levels of inflation—meaning there’s limited runway for increased valuations. But 2024 should be a good year for income investing, with Morgan Stanley Research strategists calling bright spots in high-quality fixed income and government bonds in developed markets, among other areas.
2024 is likely to be a “tale of two halves,” with a cautious first half giving way to stronger performance in the second half of the year.
For the first half of 2024, strategists recommend that investors stay patient and be selective. Risks to global growth—driven by monetary policy—remain high, and earnings headwinds may persist into early 2024 before a recovery takes hold. Global stocks typically begin to sell off in the three months leading into a new round of monetary easing, as risk assets start pricing in slower growth. If central banks stay on track to begin cutting rates in June, global equities may see a decrease in valuation early in the year.
In the second half of the year, however, falling inflation should lead to monetary easing, bolstering growth. “We think near-term uncertainty will give way to a comeback in U.S. equities,” says Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. And Wilson expects earnings growth to remain robust into 2025: “Positive operating leverage and productivity growth from artificial intelligence should lead to margin expansion.”
Emerging-markets equities face obstacles, including a strengthening dollar and lackluster growth in China, where policymakers face the triple challenges of debt, demographics and deflation.
One global bright spot is high-quality fixed income. Yields on a broad cross-section of U.S. corporate and government bonds reached 6%, the highest since 2009. U.S. Treasury and German Bund yields are the highest they have been in a decade, and Morgan Stanley forecasts 10-year yields on U.S. Treasurys at 3.95%, and DBR at 1.8% by the end of 2024.
Bank of America: The Year of the Landing
A global shift to rate cuts: Inflation to gradually move lower across the globe, allowing many central banks to cut rates in the second half of 2024 and avoid a global recession. Head of US Economics Michael Gapen expects the first Fed rate cut in June and the central bank to cut 25 basis points per quarter in 2024.
The 3Ps = the 3Bs: Bull markets of 2024 will be the “3Bs”- Bonds, Bullion & Breadth. He believes the risk of a hard landing for the economy is higher-than-expected and that he awaits the classic combination of bearish investor positioning, recessionary corporate profits and easing policy—the “3Ps”—before he flips to being a full bull.
S&P 500 forecast to end 2024 at 5000, an all-time high: Bullish on equities—not because the Fed is expected to begin cutting rates next year, but because of what the Fed has already done and how corporates have adapted. EPS can and has accelerated as GDP slows, and reshoring has been identified as a tailwind by companies.
Expect Brent crude to average $90, commodities to restock: OPEC+ has been cutting supply since 2022 and will likely keep at it in 2024. Oil demand growing by 1.1 million barrels per day in 2024 as emerging markets benefit from the end of the Fed’s monetary tightening cycle. Yet Brent and WTI prices should average $90/barrel and $86/barrel, respectively. Recession, faster-than-expected US shale growth, and lack of OPEC+ cohesion are downside risks to oil prices. Lower rates should boost gold and lead to restocking in industrial metals.
Japan inflation persists: Expects an improvement in consumer spending and forecasts inflation to remain above consensus, which is a positive in the case of Japan. Our strategists expect progress with corporate reform, evidenced by the highest number of companies raising guidance in ten years.
Rate cuts and a peaking US Dollar are a positive for Emerging Markets: EM returns in the 12 months after the last Fed hike in a cycle tend to be highly positive and positioning is light across EM assets. China economic growth should stabilize. Our fundamental FX team is more bearish on the USD than consensus as US GDP growth slows and the Fed begins to cut rates.
Seek quality yield in credit: Rates, earnings and issuance will likely challenge credit in 2024, causing our credit strategists to prefer quality. They believe investment grade offers the best relative value in credit. Loans offer more carry than high yield (HY) and HY credit losses are unlikely to be lower than loans.
Slowing investment spend a drag US economic growth: The impact of fiscal investment programs should dissipate. Our US economists expect consumption to slow down but not to crash. While capex has secular tailwinds, cyclical headwinds also exist, as evidenced by fewer CEOs expecting higher capex over the next six months.
US 10-year Treasury yield should remain elevated: Not bullish on 10-year bond prices for several reasons: the US fiscal stance has deteriorated, as has its net international investment position, and duration/inflation risk have become riskier.
Policy uncertainty could rise as elections will occur in countries that make up over 60% of global GDP: Our Research team expects heightened policy uncertainty amid increasing political polarization. Fiscal consolidation becomes difficult, having implications for rates.
UBS: Soft landing more likely
We expect both equities and bonds to deliver positive returns in 2024. Slowing US economic growth, falling inflation, and lower interest rate expectations should mean lower yields, supporting bonds and equity valuations, while the absence of a severe US recession should enable companies to continue to grow earnings.
HSBC: A problem of interest
Since the Fed started hiking interest rates in March 2022, global liquidity conditions have tightened materially, bringing inflation down, but it has now raised risks of an adverse growth outcome in 2024. Markets are unprepared for this scenario and continue to assume a ‘soft landing’ – that inflation can dissipate without harming growth prospects. However, we expect a rise in recession risk in western economies, while in eastern economies, some parts of Asia could face growth challenges but still provide diversification benefits and a relative bright spot.
In the longer run, we believe a shift to a ‘new paradigm’ is underway, with inflation and interest rates somewhat higher than during the 2010s. Our preference in this environment will be for a ‘defensive growth’ approach which includes pivoting to higher quality markets. We also suggest ‘intelligent diversification’ strategies.
Lazard: Stark contrast to 2023
• Rate hikes likely shifting to cuts as inflation falls to 2%.
• The Fed engineering a “soft landing” avoiding US recession.
• China sentiment improving despite the ongoing housing overhang.
• The Eurozone and UK teetering on the brink of recession as sticky inflation precludes easing.
• Japan exiting yield curve control and negative interest rates.
• The Ukraine war dragging on and Western tensions with China ratcheting higher.
• US elections becoming the focal point as a determinant of the geopolitical trajectory.
Invesco: Deploying cash
Economies have been more resilient than we expected during 2023 but we believe they are slowing. We also believe that inflation will decline, though less smoothly than in 2023, and that major Western central banks will start easing in 2024 Q2.
History suggests that once the Fed starts easing, it will move quickly. Defensive fixed income asset returns are likely to be boosted by high yields (or higher than for many years) and the decline in those yields that we think will go with central bank easing (implying bull steepening).
Risk assets may suffer in early 2024 as economies weaken and as we await clarity from central banks but we expect better performance as the year unfolds.
Assumptions:
• Global GDP growth will slow and then recover
• Global inflation will fall but remain above many central bank targets
• Major western central banks start cutting rates during 2024 Q2 (but continue QT)
• Long-term government yields will fall but yield curves will steepen
• Credit spreads will widen in the US but be mixed in Europe, defaults rise
• Bank loan spreads will be stable but defaults rise
• Equity and REIT dividend growth will moderate but yield movements are mixed
• USD will weaken as Fed tightening ends
• Commodities will be mixed as the global economy slows and USD weakens
Deutsche Bank: Geopolitics and corporate uncertainty
Two big ideas – geopolitics and corporate uncertainty – pervade all the key themes that we present as our top ten for 2024. We elevate these two mega-themes as they are the key drivers underlying much corporate and investment decision making in the new year.
The big focus of 2024 will be the slew of elections around the world. We expect some volatility around these, particularly if markets become nervous about fiscal spending promises. But when we take a step back, the most important aspect of the elections may be observing any increase in populist views from both sides and examining how they may realign trade relations between countries.
For corporates and markets, the key point many investors underestimated in 2023 (at times, us included) was how long corporates would remain nervous as uncertainty remained high. That fact kept a lid on things this year.
In 2024, however, we expect more activity. Corporate uncertainty has dropped and there is greater visibility on the trajectory of economic and market indicators.
The year may still include an economic slowdown but that may not be the key thing that drives markets.
Also read
2023: What worked and what did not
2024: A new paradigm unfolding
2024: Market outlook and strategy
