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DWS expects superior returns from risk investments

A benign interest rate environment and a recovery in corporate profits should underpin bond and some equity markets in 2024, according to the German asset manager.
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DWS expects fixed income securities to gain traction next year, and among equities it favours Japan and Europe.

“We are currently seeing the comeback of fixed income investments after a historically long loss phase of 38 months for dollar denominated bonds,” Björn Jesch, global CIO of DWS, told a media briefing this week.

“The time of no alternatives for equities is over for the time being.”

From a multi-asset perspective, Jesch believes investors can handle the current challenges – geopolitical tensions, central banks at a crossroads, higher interest rates – “very well”.

DWS, which has €860bn ($938bn) of AUM (as of 30 September 2023) favours “robust”, well-diversified portfolios that should cope well with different economic scenarios.

“In view of our base scenario of a soft landing for the economy with a fall in inflation and interest rates, we are positive about a longer duration,” says Jesch. When it comes to inflation, however, he points out: “Lowering inflation from 10% to 5% was the easier part for the central banks. Getting from five to the targeted 2% will be much more difficult.”

In terms of equity allocation, Jesch is neutrally positioned in view of the increased attractiveness of interest rate investments and the geopolitical risks in the Middle East and prefers Europe and Japan over the US.

At sector level, he favours a more defensive orientation, for example the communication services sector.

In terms of investment styles, Jesch backs growth stocks with “quality at reasonable valuations”. Gold has its place in the portfolio as a “risk limiter and also as a yield generator”, according to Jesch. His price target for the troy ounce at the end of 2024: 2,250 dollars.

Attractive bond valuations

Taking a more granular approach to the outlook for asset classes next year, Oliver Eichmann, head of rates fixed Income EMEA likes short- and medium-term government bonds and corporate bonds.

He expects yields at the short end to fall, two-year US government bonds by 100 basis points (bps) and German short-dated bonds by around 50bps. He sees potential risks if inflation remains higher than currently expected in 2024 and the expected interest rate cuts do not materialize, as well as in an “oversupply” of bonds.

Eichmann’s outlook for corporate bonds is also positive: “Experience shows that low growth rates and the prospect of interest rate cuts are a good environment for investment-grade corporate bonds. Our favourites are euro investment-grade corporate bonds,” he said.

Attractive valuations and high yields should attract more capital, and interest rate premiums are likely to fall, he added. “Particularly promising are senior bank bonds, whose spreads should fall slightly.’

Moreover, the relatively high yields of sub-investment grade bonds are also likely to appeal to some investors in 2024. Valuations are attractive in view of the rating quality and the expected moderate default rates, but the risks for the asset class could rise in the event of a further deterioration geopolitical situation, he noted.

Corporate profits are growing again

Turning to stocks, Marcus Poppe, co-head European equities, expects that after three years in which corporate profits stagnated globally, there will be growth of 8% in the industrialised nations and 11% in the emerging markets in 202.

“However, this puts us around three percent below the consensus expectations, which we believe are too optimistic as they do not take sufficient account of the impact of high interest rates,” said Poppe.

He noted that expectations for the MSCI All Country Asia ex Japan are particularly optimistic – here the consensus expectations for earnings growth are high at 21%. DWS, on the other hand, expects growth of 13%.

“In 2024, total returns of 6% on the global equity markets are realistic,” he said.

According to Pope, the US market is very highly valued and the recent outperformance compared with European equities is almost exclusively due to the good performance of the “Magnificent Seven”.

Their strong influence is unlikely to change much for the time being in 2024, accounting for 20% of earnings growth in the S&P 500 next year. “Investors will stick with the winners at least until there is more clarity on future monetary policy,” expects Poppe.

The stock markets in Europe and Japan are more promising than the broad US market in 2024, said Poppe.

In Europe, second-line stocks, which have suffered from the risk aversion on the markets and have low valuations, are particularly interesting to him. “If – as we expect – there is a soft landing for the economy, these stocks are extremely promising.” says Poppe.

DWS’s top pick for Asia is Japan, both from a valuation perspective and in terms of earnings growth, which is supported by the weak yen. Japanese equities are also a good way to benefit from China’s growth opportunities, Poppe added.

Part of the Mark Allen Group.