Year-end thoughts and what to expect in 2024 Year-end thoughts and what to expect in 2024 Year-end thoughts and what to expect in 2024

Year-end thoughts and what to expect in 2024

Equities 5 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  The year 2023 was a year of extremes and divergences. The global economy was resilient against aggressive monetary policy hikes, but China faced serious structural growth issues. The US equity markets were pushed to new highs by the technology hype cycle, but the green transformation stocks were the biggest losing theme. The war in Ukraine continued, and a new hot spot emerged in the Middle East. While central bank policy was more or less synchronized, the Bank of Japan held on to its negative policy rates. 2024 will be a year of uncertainty. Investors will be wondering whether the US economy will fall into a recession, whether inflation and wages will prove sticky, and whether the global economy will reaccelerate. The war in Ukraine, the Middle East conflict, and elections in Taiwan, India, the US, and potentially the UK will all be major risk factors.

The year of extremes and divergences

Just as one could not imagine equities to be crazier it did happen in 2023. It is always difficult to summarize a year in all its details but below are some of the key events to reflect on.

  • Consensus was clearly in the recession camp but the global economy proved to be resilient against aggressive monetary policy hikes.

  • Monetary policy lags have turned out to be historical long this time most likely due to the extended period the economy was in an ultra-low interest rate environment.

  • There were great hopes for China, but the year proved to be the year of many false starts and the once unbeatable country is facing serious structural growth issues.

  • The rapidly rising interest rates caused for a brief period a banking crisis that was quickly contained and isolated to a few weak banks. Silicon Valley Bank went bankrupt and UBS took over Credit Suisse.

  • The market was convinced that the central bank would cave in during 2023 but instead central banks were steadfast and bolstered the “higher for longer” narrative pushing the US 10-year yield to 5% before aggressively falling back to the levels where they started the year.

  • Generative AI became the talk on Wall Street and investors rushed to get in on the action as Nvidia delivered two monster earnings releases on a level never seen before in history.

  • The technology hype cycle over generative AI pushed US equity markets to new historical highs in terms of index concentration with the “magnificent seven” stocks outperforming the S&P 500 by a factor of four.

  • Hopes were high for a geopolitical breakthrough in Ukraine that could force Russia to negotiate peace but instead the war transcended into a WWI style war of attrition with no end in sight.

  • To make matters worse in geopolitics a new hot spot emerged in the Middle East with Hamas attack on Israeli civilians and subsequent brutal invasion of Gaza by Israeli forces. Recently the conflict has led to attacks on ships in the Red Sea forcing ships from Asia to Europe to reroute around Africa at increased costs.

  • As much as technology was the winner in the global equity market, so was the green transformation stocks the biggest losing theme driven by an industry crisis in wind turbines and inventory glut in solar panels.

  • COP28 ended with the promise to start the era of declining consumption of fossil fuels. The rapid adoption of energy efficient solutions and in particular fast adoption of electric vehicles is already causing significant impact on oil markets. This trend will be hugely important for Saudi Arabia and Russia in the years to come shaping geopolitics.

  • While central bank policy was more or less synchronized Bank of Japan held on to its negative policy rates and yield-curve-control of the 10-year maturities government bonds. The divergent policy with the rest of the world left JPY to absorb all pressures leaving the financial market wondering when Bank of Japan will come back to the real world.

  • The strong USD and high interest rates had a negative impact on emerging market equities which once again underperformed and has moved to the dustbin of history, at least for now. Global investors seem increasingly uninterested in emerging markets.

Embrace for surprises in 2024

As 2023 is coming to an end investors will be wondering whether 2024 can once again surprise everyone. Consensus is increasingly betting on a mild recession in the US economy somewhere around mid-year. Under the assumption that consensus is always wrong this leads to two paths in 2024, 1) a hard landing scenario as high interest rates finally bite, or 2) a reacceleration of growth in the global economy. Growth remains ugly in Europe albeit stabilizing in a mild recession dynamic while the US economy remains resilient.

Next year will evolve around the following key topics:

  • Will inflation and wages prove stickier than expected and thus forcing central banks to keep policy rates higher for longer?

  • If Bank of Japan comes back to the normal world of interest rates will set in motion deleveraging dynamics as JPY has been used as key funding currency for carry trades?

  • General elections in Taiwan (Jan), India (Apr), US (Nov) and potentially UK (latest call in Dec) all have the ingredients to surprise markets and add to geopolitical risks.

  • Can US technology live up to the extreme expectations for earnings growth all will 2024 make it painfully clear that investors got carried away again.

  • Will the world get another upside surprise from generative AI that will unleash animal spirits once again?

  • Will the global economy fall into a recession or reaccelerate? Here China plays a crucial role. The key risk to the economy is the expected lower fiscal impulse in Europe and the US.

  • Will technology adoption in electric vehicles be another year of extreme growth marking the beginning of the end for crude oil market as we have come to know it? Will it force Saudi Arabia to make hasty decisions?

  • Will emerging markets stage a comeback in financial markets or disappoint once more?

  • If interest rates continue lower will green transformation stocks maybe become the biggest winner of 2024?

  • Can peace be achieved in the Middle East and will Ukraine muster enough support from the EU and US to avoid losing more territory to Russia as the war drags into its third year in 2024?
One thing is for sure, financial markets and geopolitical events will never stop surprising us and investors must be ready to embrace uncertainty as a new year is set to begin.

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