Economic and market outlook 2024
As we enter 2024, the global economic landscape presents an array of intertwined challenges and opportunities. This outlook looks at the complex dynamics shaping the global economy, offering a detailed analysis of the trends and factors influencing key markets and sectors. From the distant spectre of a mild recession in the USA, influenced by tight monetary policies and political uncertainties, to growth prospects in emerging markets such as India and Mexico, this text offers a distinctive view of the global economic scenario.
We explore the nuanced interplay between slow economic growth and rapid technological advances, particularly in sectors such as AI, healthcare and green energy. The investment landscape is divided to reveal the many movements in equities, fixed income, real assets and alternatives, highlighting the renewed attractiveness of bonds and the potential of private credit and distressed real estate assets.
In the Canadian context, the S&P/TSX will be examined for its potential to expand valuation, with a focus on the outlook for the banking sector, sector-specific trends and the influence of consumer health and economic policies.
This report not only navigates the complexities of developed and emerging markets, but also offers strategic insights for investors. In a world marked by geopolitical tensions and macroeconomic shifts, we emphasize the importance of diversification, dynamic asset allocation and a long-term investment horizon to manage risk and capitalize on growth opportunities.
As we navigate through the uncertainties and opportunities of 2024, these perspectives serve as a guide to understanding the currents of change and preparing for the evolving investment landscape.
Global economic overview
1 Developed markets :
USA: Entering 2024, the US faces the spectre of a mild recession. Tight monetary policies aimed at controlling inflation are likely to have a negative impact on consumer spending and business sentiment. Despite this, resilient corporate earnings, fueled by sectors such as AI, could offer a counter-balance, potentially leading to stock market gains. However, the US also faces fiscal challenges, with high levels of public debt and political uncertainties linked to the presidential election cycle.
Eurozone: The outlook for the eurozone is more stable, with moderate growth expected. Household disposable income remains a key driver, even if fiscal measures are receding. Challenges include navigating monetary tightening and public debt management, particularly in countries such as Italy and France. Luxury goods, driven by digital innovation, could be a sector to watch.
Japan : Growth in Japan is expected to remain moderate, but above potential. The country is facing a significant shift away from decades of fighting deflation, with the Bank of Japan cautiously adjusting its policies.
2. emerging markets :
Asia: Robust domestic demand and investment in India make it a strong point for growth in Asia. China's economic reorientation, coupled with efforts to reduce debt in its real estate sector, signals slower growth. These dynamics present distinct investment opportunities and challenges in the region.
Latin America: The trend towards nearshoring, benefiting Mexico in particular, is poised to boost economic gains in Latin America. The growth potential of exports to the USA offers attractive investment opportunities, particularly in the industrial and consumer goods sectors.
3. inflation trends
Inflation is expected to stabilize, but remains a concern. The transition to lower inflation will require continued vigilance on the part of central banks in developed markets. Emerging markets could see varied inflation trajectories, with some having room for monetary easing.
Investment landscape
Equities
1. market dynamics
- Global stock markets in 2024 are likely to be shaped by the interplay of slower economic growth and technological advances, particularly in AI.
- In the US, despite recessionary pressures, some sectors, particularly technology and AI, could show resilience and growth potential.
- European markets, facing macroeconomic headwinds, could benefit from the strength of specific sectors such as luxury goods, driven by digital innovation and strong brand equity.
2. regional focus
- Asian equities, particularly in India, offer growth potential, underpinned by domestic demand and a burgeoning middle class.
- Emerging market equities, particularly in Latin America, should benefit from nearshoring trends and a potential increase in exports to the US.
3. sector opportunities
The technology, healthcare and green energy sectors are poised for growth, driven by innovation, regulatory support and a growing global focus on sustainability.
The consumer discretionary and industrial goods sectors in countries benefiting from nearshoring, such as Mexico, could see a rise due to increased demand.
Fixed income
1. performance environment
- With interest rates having reset at higher levels, bonds have regained their appeal over equities, offering more competitive yields.
- High-yield bonds may face challenges in the first half of the year, but could become more attractive as financial conditions ease.
2. credit markets
- Credit markets could come under pressure from higher interest rates, impacting borrowing costs for businesses.
- Opportunities could emerge in stressed credit sectors, where dislocations can provide attractive entry points for sophisticated investors.
3. government bonds
- Government bonds, particularly in developed markets, will continue to play a crucial role in providing stability and income in a multi-asset portfolio.
Real assets and alternative investments
1. Real estate
- Certain segments of the real estate market could come under pressure, presenting opportunities for certain distressed assets.
- Commercial real estate could see a reshaping as teleworking trends and economic changes impact office and retail spaces.
2. private credit
- The private credit market could offer higher yields and diversification benefits, particularly for investors seeking alternatives to traditional fixed income.
Cash and cash equivalents
Role in Portfolios :
- Cash and cash equivalents, despite lower yields, offer liquidity and security, essential in a volatile market environment.
- Strategic cash allocation must be considered in the context of liquidity needs, risk tolerance and overall investment objectives.
Geopolitical and macroeconomic considerations
Impact on markets :
Geopolitical tensions and macroeconomic factors, including central bank policies and global trade dynamics, will play a crucial role in determining market outcomes across asset classes.
Investors must remain vigilant to the impact of these factors on market volatility and asset valuation.
Strategic considerations for investors
1. diversification and dynamic allocation
- Diversification across asset classes, geographies and sectors is crucial to navigating the mixed economic signals and varied market performances expected in 2024.
- Dynamic allocation enables investors to respond to changing market conditions, economic indicators and geopolitical developments.
2. long-term outlook and risk management
- A long-term perspective is key, especially in volatile markets. Equities, despite their short-term fluctuations, have historically offered superior returns over long periods.
- Risk management is paramount, with a focus on balancing growth opportunities with the risks associated with economic slowdowns, geopolitical tensions and market volatility.
Active management
Active management could play a key role in navigating market complexities, identifying undervalued assets and adjusting portfolios in response to changing market conditions.
Geopolitical and regional factors
Geopolitical risks :
- Ongoing geopolitical tensions, including the war in Ukraine and conflicts in the Middle East, continue to pose risks to global stability and market sentiment.
- The US presidential election could introduce policy changes and uncertainties, impacting both domestic and global markets.
Sector-specific trends :
- Repatriation trends could benefit specific sectors, such as industrial and consumer goods in Latin America.
- European luxury brands, taking advantage of digital innovation, are well placed to succeed in a high-inflation environment.
American economy
Second economic slowdown: The second anticipated downturn in the US economy could have a significant impact on consumer sectors. This refers to a retraction following a brief recovery, marking a difficult environment for businesses, particularly in the consumer discretionary and core sectors of the S&P 500.
Corporate earnings resilience: Despite economic challenges, corporate earnings should remain robust. This resilience could be supported by a continued decline in inflation rates. However, the global stock market is likely to see modest returns. This is attributed to a mix of lower analyst estimates and the potential for changes in monetary and fiscal policy.
- Sector and market dynamics
Leading cyclical sectors: Cyclical sectors, strongly influenced by the global economic cycle, are predicted to outperform other sectors. Within these sectors, companies with strong fundamentals (quality) and those undervalued relative to their intrinsic value (value) are expected to outperform.
Small-cap vs. large-cap performance: The performance disparity between small-cap and large-cap stocks is highlighted, with small-cap stocks potentially outperforming large-caps in specific economic scenarios, particularly if they benefit from economic recovery.
- Economic indicators
Economic regime model: the models indicate a recession, suggesting that the economy is entering a phase rarely seen in recent history - a double dip. This model probably incorporates various economic indicators.
Key indicators pointing to recession: The Purchasing Managers' Index (PMI), consumer sentiment, unemployment claims and capacity utilization all point to recessionary conditions.
- S&P 500 valuation and earnings
Fair value projections: The S&P 500 is considered to be valued with the expectation of a minor recession. Upside potential appears limited unless there is a significant positive change in earnings growth or a more accommodative monetary policy environment.
Earnings and revenue outlook: Growth is expected in all S&P 500 sectors, although consumer-oriented sectors could face greater challenges, potentially due to the recessionary impact of the double dip.
- Russell 2000 Index
Performance and valuation: The Russell 2000, known for its small-cap stocks, shows moderate upside potential, but is constrained by its recent trading range, reflecting market uncertainty and investor caution.
Sector performance: Within the Russell 2000, cyclical sectors, particularly financials and energy, should show strength, benefiting from economic conditions.
- Macro and microeconomic factors
Unemployment rate trends: The unemployment rate is a crucial indicator to monitor. An increase above certain thresholds could be the harbinger of a more pronounced economic slowdown.
Inflation and margin trends: Inflation trends are key to understanding cost pressures and consumer spending, while margin trends help assess corporate profitability, both of which are crucial for evaluating stock price directions.
- Large-cap equity factors
Importance of quality and value: For large-cap stocks, quality (e.g. strong balance sheets, consistent earnings) and value (stocks undervalued relative to their intrinsic value) factors are highlighted as key in stock valuations. In addition, momentum (the tendency of stocks to continue to perform as they have done recently) is also gaining importance in analysis.
Canadian Economic Outlook 2024
Historical comparison: At the start of 2024, the S&P/TSX is trading below its pre-pandemic average. Its forward P/E ratio, despite a rally in December, remains below average since 2010. This underperformance relative to its historical average and a significant discount to the S&P 500 suggest potential for valuation expansion.
Consumer health and economic concerns: These factors, along with changes in central bank policy and a shifting yield curve, could both challenge and boost the index.
- Multiple expansion potential
Expensive stocks: The S&P/TSX's most expensive stocks, mainly in materials, technology and industrials, show potential for valuation expansion. Their forward P/E ratios have remained stable throughout 2023, indicating room for growth.
Cheaper equities: The cheapest quintile, mainly in energy and finance, has seen a normalization of valuations, but remains significantly below its historical average.
- Banking sector outlook
Influence of the yield curve: A flattening yield curve could raise bank valuations, as banks generally benefit from a wider curve. However, consumer health concerns have disrupted this trend, similar to previous economic downturns.
Consumer bankruptcies and bank P/E: With consumer bankruptcies remaining below pre-pandemic levels and increasing only slightly in 2023, there is potential for a recovery in bank P/E.
Sector-specific trends
Technology and Industrials: These sectors are the exceptions in the S&P/TSX, trading at multiples above the historical average. In technology, only a few stocks are trading below their pre-pandemic median valuations.
Industrial sector details: Within industrials, specific segments such as transportation and commercial and professional services are trading significantly above their historical medians.
The Canadian economic outlook for 2024 suggests that the S&P/TSX could experience a valuation expansion, particularly in its most expensive quintiles. This expansion depends on a number of factors, including consumer health, economic growth prospects, central bank policies and yield curve dynamics. The banking sector, in particular, could see a rebound, while technology and industry present a mixed picture. Overall, the outlook indicates cautious optimism for Canadian market growth, with specific sectors and share classes offering potential opportunities.
Conclusion
As we conclude our in-depth exploration of the economic landscape of 2024, it's clear that we're navigating through a period of transformation. The information gathered from this perspective aims to bring clarity amidst the complexities of a rapidly evolving global economy.
The year 2024 presents a unique confluence of challenges and opportunities - from the potential of emerging markets to the resilience of developed economies in the face of policy change and technological innovation. Nuanced analysis of sectors such as technology, healthcare and energy, alongside critical examination of equity and fixed-income markets, underscores the need for strategic agility and informed decision-making.
In the face of geopolitical tensions, fluctuating market dynamics and economic headwinds, the importance of a well-considered, diversified investment approach cannot be overstated. Investors are encouraged to remain vigilant, adaptive and forward-looking, drawing on the information in this report to make informed decisions that align with their long-term financial goals.
May this perspective give you the knowledge and confidence to navigate the economic terrain of 2024, capitalizing on opportunities and mitigating risks, as we all strive towards a prosperous and resilient future.
