22-Nov-23 Letter to Investors

2024 – it could be good, by year end

How optimistic can we be about investments in 2024 if the year starts with a recession? We can to some extent because our forecasts focus on the end of the year.

Björn Jesch

Björn Jesch

Global Chief Investment Officer

"Every market forecast at present, not just ours, stands or falls with the path of inflation. We are also not alone in our estimate of a below 3% inflation rate for the U.S. and eurozone by the end of 2024. This would be a basis for a good investment year, especially for bonds."

Björn Jesch, Global Chief Investment Officer

We expect 2024 to be a good investment year. Let's start with this simple but positive conclusion, as many market participants will have no difficulty listing a dozen reasons not to be optimistic. But our core scenario is cautiously optimistic.

We expect 2024 to be a good investment year.

We expect a slowdown in global economic growth in the first half of the year, which should be followed by a mild upturn in the second half. For the U.S. and Europe this would mean full-year growth of almost 1%, and for China almost 5%. Our inflation forecasts are almost more important. We see inflation rates on both sides of the Atlantic falling to below 3% by the end of 2024. This means they are at least approaching the central banks' comfort zone, which is likely to allow them to lower interest rates. We expect three interest rate cuts for both the U.S. and the eurozone beginning in the middle of the year. Accordingly, we believe that we have seen the peak for bond yields. After three weak years, we therefore expect bond investors to finally have another positive year, with the generous current yields even offering a certain risk buffer. From an equity investor's perspective, the combination of sluggish economic growth and generally high interest rates is less advantageous. But, after two years of stagnation, we expect companies to return to mid-single digit earnings growth and see positive price potential on the stock markets. In addition to sharing in the gains from innovation, equities continue to be capable of responding well to new bouts of inflation. Our positive view of the capital markets next year is completed by good prospects, in our view, for gold. 

If the outlook were to end here, however, it might rightly be accused of being unbalanced. The scenario sketched above is our core outlook and based on clear assumptions. The most important of our assumptions are: 1. Even after the interest rate cuts, monetary policy is expected to remain restrictive for growth and inflation; it should become less restrictive in 2024, but not accommodative. We therefore do not expect inflation to flare up again but concede that not everything may follow the usual path in this unusual cycle. 2. Central banks need to steer investors correctly so that their work is not counteracted by rapid falls in bond yields. 3. Given strong labor markets and full capacity utilization, we do not expect a full-blown recession. At the same time, we must acknowledge that there is a risk that we have not yet seen all the financial victims of the rapid rise in interest rates, and accidents could continue to happen. 4. There is a risk that record U.S. debt, coupled with another year of high twin deficits and resulting high refinancing needs, could lead investors to demand a higher risk premium for longer-dated U.S. Treasuries. 5. A further source of unpredictability is the large number of geopolitical hotspots and important elections coming up next year.

As we see many risks, we continue to maintain a broad diversification of investments. We have hardly any regional preferences for equities and see different strengths in different regions: restructuring progress in Japan; favorably valued cyclicals and small caps in Europe; and the big winners of technological change in the U.S. In bonds, on the other hand, we favor medium-term government bonds and higher-yielding corporate bonds, with a geographical preference in both cases for Europe. We also like emerging market bonds.

Last but not least, in our outlook we like adding gold and alternative investments: infrastructure that benefits from government programs or inflation-indexed contracts, or selected residential and logistics real estate. Overall, as mentioned at the beginning, we expect a good investment year, with volatility in equities but adequate returns and fewer fluctuations in bonds.

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