Are you optimistic or pessimistic on equities? Are you optimistic or pessimistic on equities? Are you optimistic or pessimistic on equities?

Are you optimistic or pessimistic on equities?

Equities 5 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  The outlook for global equities in 2024 is uncertain, with both optimists and pessimists holding strong views. The optimists believe that the US economy is on a solid footing, inflation is slowly coming down, and the consumer is not dead. They also believe that generative AI has the potential to significantly boost economic growth and remain overweight cyclical sectors in the equity market. The pessimists, on the other hand, believe that the US government's fiscal stimulus is unsustainable, Europe is already in a recession, China is slowing down, and consumers are running out of savings. They also worry about geopolitical risks, refinancing of debt, earnings expectations, and inflation surprises. As a result, they recommend overweighting defensive sectors such as energy, utilities, consumer staples, and health care, and long volatility through puts on technology stocks.


Low visibility due to unusual circumstances

Everything in financial markets and the global economy have been unusual since the pandemic broke out in 2020 ushering extraordinary policy moves, supply chain chocks never seen before, and the first full scale conventional war on the European continent since WWII. With sticky inflation reappearing like a bad horror movie from the 1970s central banks slammed the brakes on financial conditions launching in 2022 the most aggressive policy rate cycle since 1971.

The Fed’s move was a time bomb waiting to explode but the Biden administration’s aggressive fiscal moves in 2022 offset the pain from the Fed policy hikes and the extended period of low interest rates had also locked in households and corporates at very low interest rates. In effect long lags were operating in the economy and did not slip into a recession in 2023 as expected. As long lags from monetary and fiscal policies are still working their way through the economy the visibility and understanding of the underlying dynamics are very difficult to get right for investors and traders. We are in a situation where investors can pick and choose whatever indicator they want to support their outlook for 2024.

Below we have set up the case for the optimist and the pessimist highlighting the factors that support each views.

The optimist: The good times will continue sending equities higher

After having dodged the recession bullet in 2023 and inflation slowly coming down, the optimist feels the outlook is more stable and less worried about the AI hype and boom in technology stocks. What are some of the key factors that support a positive view on global equities in 2024?

  • US economic growth accelerated in December and is setting a bit below the long-term trend. Although Europe is in a mild recession the situation is stable and lower energy prices should begin improving conditions going forward.

  • The US consumer is not dead with the US weekly Redbook Index (same store sales) having rebounded from negative growth in July 2023 to slightly below 5% growth in December suggesting the combination of lower inflation and median wage growth just above 5% is expanding household budgets.

  • US financial conditions have eased to levels below the 2018-2019 average suggesting financial conditions are easy supporting economic growth.

  • Earnings growth expectations in S&P 500 the next 12 months at 8% are not high in a historical context and unless the economy slips into a recession it should be possible to deliver this growth in 2024.

  • Generative AI is a significant productivity enhancement technology that has the ability to lift real economic growth in the coming decade. Next to generative AI companies such as Google is doing significant progress on quantum computing with a breakthrough seemingly closer than ever which would unleash enormous potential in scientific discovery.

  • The US equity market looks a bit overstretched and even dangerous with the high index concentration in technology stocks, but the MSCI World is valued a bit cheaper than the historical average since 1995, so the return prospects are solid for 2024 if companies can deliver on earnings.

How to position the portfolio?

  • Overweight cyclical sectors such as IT, financials, consumer discretionary, industrials, materials, real estate, and communication services

  • Sell volatility capturing the roll yield because of hedging flows

  • Overweight EM equities as lower financial conditions will keep the economy going and ease refinancing pressures in emerging market countries

  • Long duration trades such as long 10-30yr bonds, high yield bonds, utilities and telecommunication

  • Long equity themes such as AI/semiconductors, cyber security, commodities, renewable energy, and green transformation
US Financial Conditions Index | Source: Bloomberg

The pessimist: Chickens are coming home to roost

The global luckily avoided a recession in 2023 although Europe could not escape it as the pain from higher energy prices and a weak Chinese economy became too much for the European economy. Equity markets went too far last year on the hopes of generative AI and the pain of higher interest rates will come to haunt consumers and companies in 2024. Below we list some of the factors that drive a pessimistic view on equities in 2024.

  • The US government cannot continue its large fiscal impulse and the lower fiscal deficit hits economic growth like a hammer during 2024 pushing the US economy into a recession.

  • Europe is already in a recession with high inflation (stagflation) and China is slowing down without any hope of finding a solution to its ugly balance sheet problem which eventually drags the entire global economy into a recession.

  • Consumers have used up the majority of their savings from during the pandemic years and will begin reining in consumption.

  • Geopolitical risks will not ease in 2024 and just add to uncertainty, inflation, and volatility.

  • Refinancing of debt will increasingly begin to bite lowering sentiment among consumers but also corporates.

  • Earnings expectations are too high and continued wage pressures will continue to compress profit margin hitting sentiment at one point.
  • 1-year inflation swaps are already 2% which is the central bank target so against expectations inflation can surely only surprise to the upside forcing the Fed to lower the policy rate less than expected.

  • Animal spirits were unleashed in 2023 due to the hype over generative AI. The technology will likely prove to be a game changer long-term but in the short-term it will fail to live to expectations cause a deeper correction in technology stocks.

How to position the portfolio?

  • Overweight defensive sectors such as energy, utilities, consumer staples and health care.

  • Long volatility through puts on technology stocks

  • Long gold and overweight short-term duration bonds

  • Overweight equity themes such as nuclear, defense, and high quality companies

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.