Developed market equities may be a tricky bet, while emerging markets appear attractive
In my previous piece, I looked at how investment managers foresee a cautious economic landscape with potential for a US slowdown or ‘soft landing’, influenced by weaker consumer spending and policy shifts. Looking further afield, there will likely be knock-on effects on other developed countries, as well as more dynamics at play in emerging markets.
Below, I list more key issues for investors in 2024. The actual report for each manager’s view is available by clicking on its name.
Developed market equities are a tricky bet
Most investment managers are neutral or underweight developed market equities in 2024, except for Japan.SchrodersandState Street Global Advisors (SSGA)both see Japan as an attractive market, citing positive macro (pick-up in inflation, depreciated yen) and micro trends (regulatory reforms and corporate governance improvement).
Russell Investmentsechoes this view, but is waiting for sustainable corporate changes to take place. For the US and Europe, the recurring word is ‘quality’ as the business cycle rolls over and the uncertainty about the impact of higher rates weighs on the economy. The US has become a difficult bet for many, given expensive valuations and the highly concentrated market. In addition to quality, managers are focused on value and prioritizing defensive sectors.
Allspringhighlights that US small and mid-caps are relatively attractive compared with large caps and should fare well as the US cycle restarts later in 2024. Conversely,Fidelity Internationalwarns against small caps as they tend to struggle in downcycles.
Morgan Stanley IMis one of the rare managers overweighting US equity. Still, it is very selective, preferring industrials that benefit from re-shoring, basic materials where there is a supply shortage and consumer staples that have been battered by major uptake in weight-loss drugs. On a more opportunistic basis and joiningRussell Investments,Morgan Stanley IMsees significant relative value in segments of real estate investment trusts and listed infrastructure equity.
In general, there is little appetite for European equity as managers worry about the pace of the slowdown on the old continent.T Rowe PriceandSSGAnote that opportunities may emerge only later in 2024. Views are split on the UK:Schrodersargues that UK equities are cheap and wrongly perceived as UK-centric businesses, when they are mostly global. ButFidelity Internationalpredicts that the UK will underperform due to its large exposure to the energy and mining sectors.
Fixed income eyes up US
In general, managers are positive on developed market fixed income for 2024. Nuances are on duration and market segments. In the US, most are overweight US treasury, in line with their Fed policy expectations. WhileSSGAis comfortable with extending duration, BlackRock and Allianz GIprefer short-term treasuries where they expect volatility to be lower.
Views are less unanimous on US corporate investment-grade and high-yield bonds where most managers note that spreads are tight and do not compensate for an environment of economic uncertainty. SSGA underlines the contradiction that investment-grade spreads stand slightly below their 20-year average while fundamentals are expected to weaken.Fidelity Internationalstands apart from the crowd with an overweight on inflation-linked treasuries as it expects an inflation surprise in H1 2024.
Another area where views are mixed is Europe:Invescoexpects European investment grade to outperform due to greater economic slowdown and policy easing, whileAllianz GIandSSGAare cautious as both are concerned with inflation. For example,Allianz GIexpects surprises in core inflation as it sees a genuine wage-price spiral happening in the euro area.
Emerging markets are attractive
Views on emerging marketsare separated into non-China and China. Except for Russell Investments,SSGA andFidelity International, all the managers are overweight emerging marketsex-China equities on the back of a favorable macro backdrop, structural and cyclical growth stories, attractive valuation and diversification from developed market equities.
Matthews Asiahighlights that many key emerging marketcountries are in strong fiscal health, which can offset a slowdown in global economic activities. India and Mexico are now seeing a ripening in the fruit of previous reforms. Vietnam, Malaysia, Indonesia, Brazil and Chile stand as potential beneficiaries of friend-shoring initiatives – the practice of prioritizing trade relations with politically and ideologically aligned countries.Franklin Templetonhighlights that Taiwan and Korea could significantly recover in 2024 as the technology cycle turns.
SSGAis concerned about the consensus view because, historically, emerging marketsequity tends to perform when there is stable-to-rising global growth and global trade, adequate or abundant global liquidity and stable commodity prices. Conversely,SSGAis overweight emerging marketshard-currency fixed income; it sees value in emerging marketshigh-yield bonds and expects them to tighter further, barring a US recession.
Most managers go a step further and prefer emerging markets local-currency sovereign bonds.Morgan Stanley IMcites better monetary policies in many emerging markets compared with developed markets. It highlights high current real yields, falling inflation and the end or start of easing in tightening cycles. It also foresees technical tailwinds for emerging markets debt in the coming year, noting increased interest from institutional investors.
Hesitancy about China
Investment managers present a cautiously optimistic view of the Chinese macro economy, acknowledging several challenges while also noting areas of potential growth. On the cautionary side,BlackRock,Russell Investments andSSGAemphasize China’s long-term issues like debt, property market instability, demographic changes and geopolitical risks.
Morgan Stanley IMobserves that China’s recent stimulus measures have not effectively revived economic momentum, leading to growth expectations falling short of consensus. These factors contribute to a clouded longer-term growth outlook, withSSGAspecifically forecasting a slowdown in real GDP growth from around 5 percent in 2023 to approximately 3 percent in subsequent years.Amundialigns with this cautious view, predicting a slowdown in China’s growth to between 3 percent and 3.5 percent.
Contrasting with this somewhat pessimistic outlook,Franklin Templetonsuggests China might have moved past the worst of its economic challenges, indicating a more positive turn. This view of potential recovery is shared byNinety One, which expects a more benign medium-term outcome for China, driven by moderating economic growth bolstered by productivity gains.
Delving into the dynamics of Chinese growth,Matthews Asiabreaks down China’s growth drivers into manufacturing, property and domestic consumption. It highlights that manufacturing growth is dependent on external demand and trade strategies, while the property sector’s growth is contingent on government support. But it questions the effectiveness of significant fiscal intervention in the property sector and suggests the need for the government to encourage private sector R&D to compensate.
Among managers that are more optimistic about China, there is a certain level of consensus on industry picks.Invesco,Allianz GI andSSGAare positive on China’s technology and green economy sectors.Invescohighlights the importance of re-globalization and ‘greening’, favoring companies with strong technological capabilities and global exposure, especially those involved in the comprehensive green energy supply chain.
This view aligns withAllianz GI‘s optimism about China’s ‘new economy’, encompassing technology, fintech, financial services, health tech and the green economy. Similarly, SSGA sees potential in China’s structural growth areas supported by government policy, such as technology independence and electrification.
Morgan Stanley IMidentifies opportunities in consumer-related sectors, automation, semiconductors and industries involved in the green transition and hard science-based fields.Ninety Oneobserves that while sectors like real estate may face pressure, other areas like digitalization, medical technology and certain financial institutions will benefit from trends like an aging population and state-led pension reform.
Risks to watch
– Geopolitical risks: These are top of mind for every manager in 2024.BlackRockdubs it the biggest election year in history.Wellington Managementhighlights the escalatory potential of tensions in the US/China relationship, especially regarding Taiwan and the US presidential election. Elections also heighten the risk of information warfare.Wellington Managementadds the escalatory potential of the Ukraine/Russia war, and the risk of global terrorism, particularly if Middle Eastern conflicts escalate, including the threat of major cyber-attacks on US infrastructure.
– Economic and policy risks:Invescoraises concerns about the potential impact of a lag in rates policy on the US economy, leading to weaker growth than anticipated, and the possibility of persistent inflation requiring policymakers to maintain higher interest rates for longer. For the EU,Amundipoints to risks such as bond market fragmentation and excessive tightening by the European Central Bank.Fidelity Internationalhighlights the risk posed by China’s anemic growth in 2024 and the constraint on US fiscal policy due to the election year.
– Transversal risks:Amundialso mentions transversal risks like a potential spike in energy prices and a crash in private markets.Fidelity InternationalandInvescoare specifically concerned about oil price shocks in the context of the Russia-Ukraine and Israel-Hamas conflicts. Finally,Invescoadds that financial accidents cannot be excluded, given monetary tightening.
Rui Zhang is CEO of corporate access platform Irostors
