2024: Tempering expectations

Laurent Denize – Global Co-CIO ODDO BHF                            Prof. Dr. Jan Viebig – Global Co-CIO ODDO BHF 

The turn of the year is a popular, if arbitrary, time for reviews and predictions. Equity investors also seem to have had a change of heart this New Year after an impressive year-end rally. As a result, the first few days of trading have been dominated by profit-taking and losses on last year’s winners. But even this “diet”, like so many others, is unlikely to last the whole year. Nevertheless, it has been a sobering start for the capital markets. The expectations of interest rate cuts that underpinned the rally need to materialize before the party can really continue. The question is not so much whether rates will be cut, but when and by how much. With strong growth and improved financing conditions, the Fed can wait for a sustained decline in inflation and act cautiously. The situation is more difficult for the ECB. Recession is looming in Europe; bank lending has stalled, and the Governing Council is far from unanimous on the next steps. Investors are therefore advised to temper their expectations of rapid clarity and an uninterrupted continuation of the equity rally.

Satisfactory end to a volatile year

The strong annual performance of capital markets outside China masks the fact that 2023 was largely characterized by volatility and uncertainty. This is reflected in the strong inflows into low-risk assets (particularly on Money Market) that have become profitable thanks to the turnaround in interest rates. Whether this war chest built up for uncertain times will find its way back into other asset classes will determine the outcome in 2024.

The case for Fixed Income

For Fixed Income investors, the question is whether the trend of falling yields that began at the end of last year will continue or come to a halt. Interest rates are still so high by historical standards that government debt is unsustainable. One argument in favor of investing in long-dated government bonds is that they are now one of the few investments with convexity, i.e., the value of the bond rises faster when interest rates fall than when they rise. This provides some risk buffer. In our view, corporate bonds also continue to offer a good risk/return profile for both Investment Grade and High Yield.

Where there is still growth

While the opportunities outweigh the risks for Fixed Income, the opposite appears to be true for equities, given the slowdown in growth and challenging valuations. Ultimately, however, it comes down to company growth trends, which vary from sector to sector. Even the high valuations of AI stocks, which were already booming last year, can be justified by historical comparison. When PCs, mobile phones and cloud technology were introduced, the number of users and therefore the earnings potential were significantly underestimated. This could happen again. After AI infrastructure was the main driver of growth last year, app-based applications could provide further momentum in the coming years. The opening of the GPT store by Open AI at the beginning of the year would then be the starting signal for the use of AI beyond the technology sector. This could make a difference: 2 billion iPhones were sold after the launch of Apple’s first App Store, compared to 2 mill