DWS Market Outlook 2024: Good return opportunities for risk investments – despite various uncertainties


"We are currently seeing the comeback of fixed income investments after a historically long loss phase of 38 months for in dollar denominated bonds," says Björn Jesch, Global CIO of DWS. The time of no alternatives for equities is over for the time being. "From a multi-asset perspective, we can handle the current challenges – geopolitical tensions, central banks at a crossroads, higher interest rates – very well. We favor robust, well-diversified portfolios that should cope well with different economic scenarios," says Jesch. "In view of our base scenario of a soft landing for the economy with a fall in inflation and interest rates, we are positive about a longer duration," says Jesch. When it comes to inflation, however, he points out: "Lowering inflation from ten to five percent was the easier part for the central banks. Getting from five to the targeted two percent will be much more difficult."

In terms of equity allocation, Jesch is neutrally positioned in view of the increased attractiveness of interest rate investments and the geopolitical risks in the Middle East and favors Europe and Japan over the USA. At sector level, he favors a more defensive orientation. The communication services sector, for example, appears promising to him. In terms of investment styles, Jesch favors growth stocks with quality at reasonable valuations. Gold has its place in the portfolio as a risk limiter and also as a yield generator, according to Jesch. His price target for the troy ounce at the end of 2024: 2,250 dollars.

First rate cuts expected in 2024

"We do not expect any further interest rate hikes for either the US or the eurozone. Following the rise in key interest rates – 450 basis points in the eurozone and more than 500 basis points in the US – monetary policy is likely to be sufficiently restrictive to slow down inflation and growth," says Johannes Müller, Global Head of Research. Even if central banks are currently still hesitant to discuss interest rate cuts, Müller expects key interest rates in Europe and the US to be lowered again for the first time in June 2024.

Economic growth in Europe will be weak in the first half of 2024 and will be 0.7 percent for the year as a whole, roughly the same as this year. The US economy has held up surprisingly well so far. "However, we also expect growth to slow to 0.8 percent in 2024 after 2.3 percent in the current year," says Müller. The situation in China should also improve significantly over the course of next year. However, the recovery of the ailing real estate sector will probably take a little longer. Growth in China is expected to reach 4.7 percent in 2024.

2024 will be characterized by a large number of elections, including in the USA, India, Russia, Taiwan and South Korea. In the short term, this could lead to significant market reactions – higher risk premiums for bonds, falling share prices, increased volatility, a flight to supposedly safe investments. "However, the past has shown that such reactions do not last long and the effects are very limited to sectors orsingle stocks," says Müller.

Bond markets: positive total returns in many areas

"We expect positive total returns in most market segments on the bond markets next year," says Oliver Eichmann, Head of Rates Fixed Income EMEA. "Our favorites are short and medium-term government bonds and corporate bonds." Eichmann expects yields at the short end to fall, two-year US government bonds by 100 basis points and German short-dated bonds by around 50 basis points. He sees potential risks if inflation remains higher than currently expected in 2024 and the expected interest rate cuts do not materialize, as well as in an "oversupply" of bonds.

Eichmann's outlook for corporate bonds is positive: "Experience shows that low growth rates and the prospect of interest rate cuts are a good environment for investment-grade corporate bonds. Our favorites are euro investment-grade corporate bonds." Favorable valuations and high yields should attract more capital. Interest rate premiums are likely to fall somewhat. Particularly promising: senior bank bonds, whose spreads should fall slightly.

The relatively high returns of high-yield bonds are also likely to be attractive to investors in 2024. Valuations are attractive in view of the rating quality and the expected moderate default rates. Risks for the asset class could arise in the event of a further escalation of the geopolitical situation and a stronger than currently expected recession.

According to Eichmann, covered bonds have become much more attractive again as interest-bearing investments with a very high credit quality (AAA rating). Liquidity has improved significantly and yields are currently around 0.8% higher on average than comparable German government bonds.

Equities: corporate profits growing again – Europe and Japan most promising

"After three years in which corporate profits stagnated globally, we expect growth of eight percent in the industrialized nations and eleven percent in the emerging markets in 2024," says Marcus Poppe, Co-Head European Equities. "However, this puts us around three percent below the consensus expectations, which we believe are too optimistic as they do not take sufficient account of the impact of high interest rates," says Poppe. The expectations for the MSCI All Country Asia ex Japan are particularly optimistic – here the consensus expectations for earnings growth are particularly high at 21 percent. DWS, on the other hand, expects growth of 13 percent.

In 2024, total returns of six percent on the global equity markets are realistic. The US market is very highly valued and the recent outperformance compared to European equities is almost exclusively due to the good performance of the "Magnificent Seven". Their strong influence is unlikely to change much for the time being in 2024. They are likely to account for 20 percent of earnings growth in the S&P 500 next year. "Investors will stick with the winners at least until there is more clarity on future monetary policy," expects Poppe.

The stock markets in Europe and Japan are more promising than the broad US market in 2024. In Europe, small and mid-caps, which have suffered from the risk aversion on the markets and have low valuations, are particularly interesting. "If – as we expect – there is a soft landing for the economy, these stocks are extremely promising," says Poppe. "Our top pick for Asia is Japan, both from a valuation perspective and in terms of earnings growth, which is supported by the weak yen," says Poppe.  Japanese equities are also a good way to benefit from China's growth opportunities.

Real estate: Good time to enter the market – valuations soon to bottom out

"2024 should be a good time to invest in real estate equity," says Jessica Hardman, Head of European Real Estate Portfolio Management. The market risks are largely priced in after the price falls of the last 18 months. In the European market, the residential and logistics real estate sectors are particularly promising. Supply is low, higher financing costs are leading to significantly higher demand for rental properties and rental prices are likely to rise again.

Hardman also sees opportunities in the area of real estate debt, i.e. the financing of real estate investments. Margins have recently improved thanks to higher interest rates and competition has eased. Particularly interesting: financing that is used to make real estate more sustainable as well as financing for residential and logistics properties.

With regard to the growing market for infrastructure equity investments, Hardman said: "The segment is much more investable than in the past." Investors have recently been reluctant to invest in equities. "We are seeing a turnaround in the last and current quarter – transactions and investments have picked up again," said Hardman. Infrastructure debt is also promising. The asset class is benefiting from the need for financing in connection with megatrends such as the transition to sustainable, climate-neutral energy supply and digitalization.

There will also be an increased need for refinancing in infrastructure financing over the next two years, as many debt instruments are due to expire. Interest rate premiums are currently attractive. Hardman: "They are 25 to 50 basis points higher for senior bonds and 50 to 75 basis points higher for junior bonds than before Russia's attack on Ukraine."



About DWS Group

DWS Group (DWS) with EUR 860bn of assets under management (as of 30 September 2023) aspires to be one of the world's leading asset managers. Building on more than 60 years of experience, it has a reputation for excellence in Germany, Europe, the Americas and Asia. DWS is recognized by clients globally as a trusted source for integrated investment solutions, stability and innovation across a full spectrum of investment disciplines.

We offer individuals and institutions access to our strong investment capabilities across all major liquid and illiquid asset classes as well as solutions aligned to growth trends. Our diverse expertise in Active, Passive and Alternatives asset management – as well as our deep environmental, social and governance focus – complement each other when creating targeted solutions for our clients. Our expertise and on-the-ground knowledge of our economists, research analysts and investment professionals are brought together in one consistent global CIO View, giving strategic guidance to our investment approach. 

DWS wants to innovate and shape the future of investing. We understand that, both as a corporate as well as a trusted advisor to our clients, we have a crucial role in helping to navigate the transition to a more sustainable future. With approximately 4,500 employees in offices all over the world, we are local while being one global team. We are committed to acting on behalf of our clients and investing with their best interests at heart so that they can reach their financial goals, no matter what the future holds. With our entrepreneurial, collaborative spirit, we work every day to deliver outstanding investment results, in both good and challenging times to build the best foundation for our clients’ financial future.

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