Pictet Wealth Management (WM) advises investors should lock in the highest bond yields since 2010, before rates fall. While in the equity markets, lower nominal growth, higher funding costs and tight labour markets will challenge corporate profitability.
“We are calling 2024 ‘The Year of the Funambulist’ as we see economies walking a fine line in order to avoid a severe recession,” said Dong Chen, chief Asia strategist and head of Asia research, Pictet Wealth Management.
He expects a substantial slowdown in global growth, including – most likely – a mild recession in the United States in the first half, while Europe as a whole can avoid a severe recession and recover in the second half, Chen (main picture) told a media briefing in Hong Kong on Wednesday.
Chen expects world economic growth to remain modest this year, with global GDP growth expected to decline from 3% this year to 2.8% in 2024.
“As inflation further decelerates in most developed markets, we expect central banks to start to cut interest rates from mid-2024. Overall, in this global environment, fixed income looks a more attractive asset class than equities in 2024,” said Chen, emphasising that he sees strong potential to move from cash to longer duration bonds.
“We believe now is a good moment to move cash and cash-like allocations back into fixed income so as to lock in current attractive yields, mitigate reinvestment risk and potentially benefit from capital appreciation,” he said.
Among equities, Rickie Jia, head of discretionary portfolio management, multi-asset and management Asia, Pictet Wealth Management, believes developed-market equities could achieve revenue growth in the mid-single digits in 2024.
However, “we believe the present rate environment makes it vital to discriminate between companies with tight cash balances and those that have plenty of cash flow,” he said.
In particular, Jia (pictured above) likes companies that have sufficient free cash for dividends and equity buybacks (thus potentially helping their share price).
Resilient Asia
Meanwhile, emerging markets should remain more resilient, with Asia ex-Japan likely to be the main contributor.
Jia expects a broad earnings recovery for Asian equities in 2024, outpacing that of other developed markets. In addition, most markets are trading below their long-term valuations and have underperformed other developed markets in 2023, he noted.
China will benefit from a subdued recovery as government support measures help activity and stabilise the housing market, which remains the structural headwind facing the economy, according to Chen.
India’s economy’s momentum should hold up in the near term thanks to strong capex and industrial activity, and Taiwan and South Korea, the two main tech exporters in the region, could continue to recover amid the upturn in the global semiconductor cycle. On the other hand, slower global growth looks set to weigh on Southeast Asia in 2024, said Chen.
However, in general, “credit and emerging market local fixed income markets look more attractive than equities on a risk-adjusted basis, according to Jia.
“Prospective rate cuts this year mean we are now positive on investment-grade bonds on both sides of the Atlantic. However, our tight focus on credit quality means we continue to underweight noninvestment-grade bonds,” he said.
“While we could see mild compression in US margins and the S&P 500 looks richly valued, valuations for European and Japanese indices could hold up better. We expect most returns from equities in 2024 to come from dividends and share buybacks,” he said.
