Thomas Salopek, Head of Cross Asset Strategy, and Marko Kolanovic, Chief Global Markets Strategist, along with other analysts, discuss the outlook for 2024, including topics such as the impact of reopening in China, potential economic slowdown, skepticism towards inflation decline, underperformance of active investors, bullish outlook on Japan, and investment recommendations such as gold and silver.
Restrictive monetary policy in 2024 will slow down global economies and negatively impact risk markets.
Softening consumer trends and elevated geopolitical and political risks contribute to a bearish outlook for equities in 2024.
The need for climate financing is increasing, highlighting the potential for commodity price increases and upside in agricultural commodities.
Deep dives
Expectations for Global Markets in 2024
The podcast discusses the macro and market landscape in 2024. The main ideas highlighted include the unexpected strength in the global economy in 2023, driven by reopening in China, strong fiscal spending in the US and Europe, and resilient consumer spending. However, for 2024, the podcast expects restrictive monetary policy to slow down global economies, eroding consumer strength and negatively impacting risk markets. The divergence between different risk markets and economies is emphasized, with caution expressed regarding elevated risk of recession and relatively high valuations in the equity and credit markets. The price target for equities for 2024 is maintained at 4,200, suggesting a relatively bearish outlook compared to competitors.
Global Economic Outlook and Earnings Growth
The podcast explores the global economic outlook and earnings growth. The chief global economist discusses skepticism towards soft landing scenarios, emphasizing the potential for an erosion of health and a gradual deterioration of the economy. He notes the tension between late cycle monetary policy and early-mid cycle private sector health. The chief global equity strategist highlights the concentration of equity in the market, the potential loss of pricing power for companies, and the likely impact on profit margins amidst falling inflation. The bearish outlook for equities in 2024 is attributed to softening consumer trends and elevated geopolitical and political risks. The recommendation is to overweight bond proxies and quality stocks at a reasonable price.
Outlook for International Equities and Currencies
The podcast presents the outlook for international equities and currencies. The chief global equity strategist discusses the contrast in risk-reward compared to the previous year, highlighting the narrow market leadership, the underperformance of defensive and value stocks, and the potential headwinds for corporate margins in a falling inflation environment. Japan is identified as a bullish opportunity due to low cost of capital and potential support from capital inflows. The head of FX research expects the US dollar to be bumpy but elevated, influenced by US exceptionalism and falling inflation. The key drivers for currencies are discussed, with considerations for dollar weakness on a rebound story and growth basing out in Europe and China, but also the support for the dollar from higher yields and growth exceptionalism.
Outlook for Credit Markets and Emerging Markets
The podcast covers the outlook for credit markets and emerging markets. In credit markets, the expectation is for relatively attractive all-in yields and spread tightening, with the potential for high single-digit returns. Defaults are expected to be lower than forecasted, with a favorable backdrop for credit markets due to light net issuance and decreased default rates. In emerging markets, the outcome depends on the US cyclical position, with potential for positive performance in a self-landing scenario. Emerging market currencies are overweighted, while local currency bonds and EM spreads are neutral. The potential for capital inflows into EM is mentioned, supported by the expected room for EM central banks to ease. Tactical positioning and sector-specific approaches are emphasized in commodities markets, with gold maintained as a buy recommendation.
Election Calendar and Long-Term Risks
The year 2024 will see 77 elections, with 50% of the world's population and 60% of global GDP going to the polls. The US election will be closely watched, as it has significant global consequences. Long-term risks highlighted are de-globalization, de-dollarization, and decarbonization. Trading patterns have shifted, with Mexico and China's share of US imports converging. Emerging markets countries are diversifying away from the dollar. The need for climate financing is increasing, and tech risks like cyber security are a concern. Market implications include a potential upside risk to the US dollar, commodity price increases, and agricultural commodity price upside.
Tactical Implementation of Strategic Asset Allocation
Tactical implementation of strategic asset allocation is necessary in 2024. The quant CMA model recommends underweighting US stocks, overweighting US and UK bonds, overweighting safer pockets of credit, and having a bullish longer-term view on gold and silver. Tactical opportunities exist as distortions created in the market may reverse. We expect lower bond yields by the end of 2024, regardless of the economic situation. Stocks face challenges due to high inflation and pricing power. Correction catalysts include growth risk, unachievable earnings expectations, and rising interest rate expenses. Strategic asset allocation recommends a cautious allocation for now, with a reassessment based on market inflection points in 2024.
