In this episode of our Talking Heads podcast, Andrew Craig, Co-head of the Investment Insight Centre, and Daniel Morris, Chief Market Strategist, discuss our 2024 Investment Outlook “Stepping into a new reality.” The discussion focuses particularly on the questions raised during recent meetings and events to discuss our outlook for 2024.
The outlook covers the shift in the macroeconomic setting that investors can look forward to and what this means for asset allocation. Separately, they discuss the 2023 rally of the ‘Magnificent-7’ (large-cap US equity tech stocks) and the importance of diversified equity investing.
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Read the transcript
This is an audio transcript of the Talking Heads podcast episode: New realities for investors in 2024
Andrew Craig: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing the investment outlook for 2024 and what we think lies ahead. I’m Andy Craig, Co-head of the Investment Insight Centre at BNP Paribas Asset Management, and I’m joined today by Daniel Morris, Co-head and our Chief Market Strategist. Welcome, Daniel.
Daniel Morris: Thank you.
AC: Our 2024 Investment Outlook, entitled ‘Stepping Into a New Reality’, speaks to both the changes that artificial intelligence is bringing to societies and economies, and our view that in 2024, we will step into a different sort of macroeconomic reality. Could you talk us through the main points of our macroeconomic outlook and the market environment we anticipate in 2024?
DM: Let’s start with the surprises we saw in 2023: much better-than-expected US growth and decelerating inflation. The other significant surprise was China’s disappointing growth.
On China, we are hoping for more stimulus and therefore better growth in 2024. We were hoping for that at the beginning of 2023, but we’ve come to realise that Beijing’s objectives might not necessarily align with our own. But hopefully it will come through, and we expect that it will.
We may be disappointed in terms of the outlook for US growth. We are looking for a ‘soft landing’, which is probably the single most important judgment to make for next year. That said, there are always risks, and we could end up with a recession for various reasons. But even then, we think it would be a mild one.
While we are anticipating a soft landing in the US, we don’t want to overstate how positive that is. It still means slowing growth and we have to anticipate over the months ahead that the marginal economic data is going to worsen, even if in the end we get a positive growth rate for the year. That will present some challenges both for defensive assets and risk assets as markets oscillate between believing it’s just a slowdown or a prelude to a recession.
We think things should get better for Europe than in 2023, where we’ve seen relatively weak growth. Arguably, Europe is currently in a mild recession, but that means you should see a recovery next year. Even if the absolute rate of growth remains higher in the US than in Europe, there is still likely to be a slowing growth trend in the US, while it accelerates in Europe.
What does all that mean for markets? Well, we are currently primarily focused on the slowdown in growth, so we are overweight government bonds, in particular US government bonds and US TIPS (inflation-linked bonds). Slower growth should lead to lower real yields, which should also be supported by the US Federal Reserve finally cutting interest rates.
There’s the question of how quickly that happens and how far the Fed goes, but we are fairly confident it will happen in 2024, given the inflation slowdown we’re seeing. As for equity markets, we are neutral in most markets, but with an underweight in European equities as that is where we see the greatest risk to growth relative to corporate profit expectations.
AC: On your recent intercontinental tour to present our Investment Outlook to clients, the topic of China arose repeatedly. China has been through a stop-start recovery since it abandoned its strict coronavirus controls at the start of 2023. Why do you think its economic performance disappointed so much in 2023, and might it get better in 2024?
DM: The disappointment may just be relative to unrealistic expectations as there was probably a bias among Western investors in assuming that because the lockdown in China was so long, the recovery would be stronger than in the US and Europe.
Clearly, that was not the case. One reason could be that Beijing did not provide anywhere near the same level of support to households during the three years of lockdowns relative to what we saw in the US and Europe. So when the reopening finally came, households probably didn’t feel so flush with cash as those in the West; confidence levels were lower and there was much less spending.
Another important factor is the weak property market. Again, the assumption at the beginning of the year was that the government would do more to support the market as it is so crucial to the economy in the sense that Beijing wouldn’t hit its growth target if it didn’t better support property developers.
That still hasn’t happened, despite some initial hints about the government stepping up support. The fundamental concern is that without a recovery in property prices, business and consumer confidence will remain weak, which would weigh on economic growth and ultimately on investor perceptions of the opportunities in the economy and the equity markets.
When we think about Chinese equities and consensus earnings growth forecasts, there are still estimates of 15% earnings growth in 2024, which makes sense to us. Coming out of lockdown, you would expect a rebound in profits. At the same time, we have seen quite a poor performance by Chinese equities on a relative valuation basis, at least in terms of forward earnings per share; they are much lower than they’ve been in the past. But that doesn’t necessarily mean they’re going to rise.
The catalyst that’s been missing is support from Beijing, and we think the potential for any rebound in the Chinese equity markets is still quite dependent on that, which leaves us in wait-and-see mode.
AC: One feature of 2023 has been the very narrow equity rally in the US stock market, driven by the ‘magnificent seven’ – the seven big tech names which have accounted for around 80% of the rise in the S&P500 index this year. Should investors be buying only those seven stocks in 2024?
DM: It might be a bit too late to do that, although there may still be investors looking to jump on this particular bandwagon.
It is better perhaps to recognise that the US market is really two quite distinct markets. The ‘magnificent seven’ indicates that, but more broadly, tech sector growth stocks in the US are different from what you see in other markets. There really is no other tech growth market like that in the US, except arguably China, but China has been dealing with other issues over the past year.
So, it is useful to look at tech stocks separately, be that via the NASDAQ 100 or Russell growth indices. It helps to recognise that the earnings outlook is different for this part of the market than in any other country. Valuations and the dynamics are also different. I think it makes sense to have an allocation view just on US tech stocks, and much more broadly than the ‘magnificent seven’.
While those seven have done well recently, there’s no guarantee they’ll do so in the future. With a diversified index, there’s the possibility that you’re investing in what turns out to be the next ‘magnificent whatever’. As always, a diversified portfolio is the best strategy. When we look at other parts of the market, say, via the Russell Value index, you can evaluate the parts of the US stock market that are more like other markets in Europe or Japan.
With the increased popularity of artificial intelligence and the potential that has for earnings, analysts’ estimates for growth tech stocks are positive. As always, though, we need to evaluate whether we think that growth will be realised.
AC: Well, our listeners can find several articles about artificial intelligence in the Investment Outlook. Thank you very much, Daniel.
DM: My pleasure.