2024 will see the third and final act of the inflation shock story that has driven asset returns over the last three years, spelling positive news for investors and consumers alike, according to the Mediolanum Irish Funds’ (MIFL’s) latest Global Market Outlook published today.
Global inflation is predicted to ease and prices expected to remain within central banks’ acceptable levels at 2% by the middle of this year,
However, MIFL cautions that rate cuts are unlikely to begin until later in the year, with the aggressive rate cuts expected by market watchers in the first quarter likely too optimistic. In a year of national elections, which can significantly impact fiscal and trading policies, the report highlights the need for money managers to be adaptable to changing economic and market conditions.
Bond Market Outlook
● Partial relief after two years of rising yields – A slowdown in growth and falling inflation is set to reduce pressure on bond markets, with bond yields likely to fall back, especially in the EU and the UK.
● European bonds may outperform the US – It’s expected the ECB will cut rates more than market currently discounts creating a softer macro backdrop, which may see European and UK fixed-income assets outperform their US counterparts. Likewise, countries with weaker economies should see bigger rate cuts.
● Emerging Markets to outperform – With some EMs taking a proactive monetary policy approach in 2023, the groundwork has been laid for a strong outlook in 2024, with the asset class already delivering higher real yields than most developed markets.
● Defensive stance on Corporate Bonds – due to slow-growth backdrop, particularly high-yield given lower credit rating, but a significant default wave is not expected as the maturity wall does not hit until 2025.
Equities Market Outlook
● Strong earnings forecast – current earnings per share estimates are above 10%, but market gains likely harder to come by in 2024 due to high valuations in Tech after a blockbuster 2023
● A year of active management with a focus on health and tech – Slower growth and higher valuations should curtail the equity rally seen at the end of 2023. However, if a global recession is averted, a further equity rise may be supported by resilient consumers and by growth sectors such as technology and healthcare, although there is potential as to whether investors will diverge from AI and technology and seek more defensive positions in healthcare, pharmaceuticals, consumer staples and utilities.
● The question of China – China could be a catalyst for global equities if it can bolster its currently struggling economy. This outcome would favour European exporters, including German carmakers, and French and Italian luxury products. Both European and Chinese equities are currently trading at more favourable valuation multiples, of 11 times and 14 times earnings, respectively, making them more attractive in the event of an economic rebound.
Brian O’Reilly, Head of Investment Strategy at Mediolanum International Funds Limited says:
“The period of inflation shock that we’ve experienced since the beginning of the pandemic almost four years ago looks to be finally closing in 2024. We believe predictions of more aggressive rate cuts early this year may be over-optimistic as central bankers remain cautious, all our scenarios see reasons to be optimistic, with global inflation expected to fall back to an acceptable level of 2% by the middle of the year, providing potential relief for bond markets, with UK and European fixed income assets set to outperform their US counterparts. Equities are expected to stay strong despite slower growth, although questions remain as to whether tech fatigue may appear and the role China will play. Diversification and adaptability will be key tools for investors in 2024 amid significant national elections, especially in the US, and ongoing geopolitical challenges.”
