Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

Our key building blocks for 2024 are: first, to enter a long duration trade, as per our last month’s report. After 3 years of an uptrend, with US & German long yields up 400bp, bond yields look set to move lower. That was the case each of the last 8 times post final Fed hike. Second, all key regions are expected by our economists to see weaker GDP growth in ‘24 than this year. US quarterly real GDP prints are projected to decelerate to stall speed for most of 2024, at 0-1% run rate, not leaving much room for error. Finally, we believe that the consensus call that corporate topline and margins are set to re-accelerate next year will be challenged, on weakening pricing and volumes. We look for flat European EPS growth in 2024, based on no recession materializing. If economies enter contraction, then earnings will naturally fall outright. In the 1H of next year, equities will likely need to negotiate earnings adjustment, as activity slows. We believe that the risk-reward for equities will start fundamentally improving once the Fed is advanced with interest rate cuts, especially if that is happening without clear consumer and labour deterioration. Until then, the chances of an accident, or a more pronounced economic slowdown, are likely to be elevated. Given this, we think the backdrop for risky assets is set to be challenging in the 1H of 2024, with spells of material weakness, and could potentially improve thereafter. Our MSCI Eurozone target for Dec ‘23 was 256, with last week’s spot just 1% away from it. For full 2024, we keep the same target. Regionally, Japan stays our OW, initiated last December, and one might not need to keep hedging the FX anymore. We have been cautious on EM vs DM in 2023, with EM seeing 10% relative weakness ytd. We think that potentially in 2H of next year EM could have a more realistic chance to outperform, as Fed starts easing. We stay UW Eurozone vs the US, for now, a call we initiated in early May, but given the increasingly attractive valuations, where SX5E trades sub 12x forward P/E, we would consider potentially changing this call as we move through 1H of 2024. At sector level, we advise a positive view on long duration/bond proxies, such as Utilities & Healthcare, and recently upgraded Real Estate. On the other side, we are UW Banks, Autos, Consumer Cyclicals, and downgrade Food Retail, Hotels & Travel and Semis to UW, post the strong run. Stylewise, we are long Quality, stay cautious on small vs large caps, but note the valuations are starting to look more interesting.

This podcast was recorded on 28 November 2023.

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