Jan 17, 2024

Market outlook - January 2024

What's next on the stock markets after the price rally at the end of last year? Björn Jesch urges caution: “Currently, we do not see any reason to set our price targets higher. Tactical stock investors should find better entry points in the course of this year."

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“Investors should not chase the market”

#1 Market & Macro

  • At the end of November 2023, our forecasts   for 2024 were based on the assumption that   the major stock markets had a high one-digit   price potential by the end of the year. Due to   rapid price rises still in December 2023, these   price targets were already achieved or even   surpassed at the beginning of 2024. Time to   revise our forecasts upwards? “Currently, we do not see any reason to set our price targets higher,” Björn Jesch, Global CIO, states.  “This would only be justified if either ten-year Treasury yields fell significantly short of our expectations of 4.2% by year-end or corporate profits came in much better than forecast by us in November. Currently, there are no signs of either.” Jesch characterizes markets as somewhat easy-going at the moment. The VIX, the S&P 500 volatility index, has meanwhile arrived at an extremely low level of 12. This indicates a rather low risk awareness of investors. “Tactical stock investors should find better entry points in the course of this year”, this is what Jesch, who is not fond of “chasing” the market, expects. Risk premiums in Europe – and particularly for small- to mid-caps – and in Japan are not as high. For this reason, Jesch prefers these two regions for equity investments over the United States.

Björn Jesch

Chief Investment Officer

52 percent

of the energy consumed in Germany was generated by renewable energies in 2023. But it’s still a long way to go. This share is set to rise to 80 percent by 2030. [1]

Topics driving capital markets

Economy: Industrial nations falter, China should bottom out

  • The U.S. economy is expected to remain sluggish during 2024, before accelerating again in 2025. The unstable geopolitical situation and the risk of further escalation are significant drags on growth.

  • Economic growth in the Eurozone is also expected to be rather moderate in 2024. However, China seems to be bottoming out, and other emerging markets are set to benefit from this development.

Inflation: too early to call it a day

  • The danger of rising inflation has not been averted yet. In Germany, the inflation rate amounted to 3.7% in December (after 3.2% in November). Higher energy prices – driven by higher carbon prices – and still rising labor costs could push inflation towards four percent in January.

  • Eurozone inflation has risen to 2.9% in December (November: 2.4%). Particularly in the services sector, the trend towards higher prices continues – plus four percent in December.

Central banks: rate cuts might take a while longer than markets expect

  • The price rally in December was mainly driven by the expectation traded on the markets that interest rates would be cut soon. There are, however, more and more signs that this expectation was premature.

  • The development of the labor market will play a pivotal role – keyword: wage inflation. An unwinding of the tight job market situation is not indicated by the most recent U.S. data. More jobs have been created, and wages have increased by 4.1% year-on-year. The U.S. Federal Reserve will probably not be in a hurry to cut rates.


    Substantial catch-up potential for European small- to mid-caps

    #2 Equites

    • The past year brought much joy to equity   investors. Despite the various political   troublespots – Russia’s ongoing war against   Ukraine, the conflict in the Middle East – ,   almost all major indices were riding high.   U.S. tech stocks were among the top   performers. The Nasdaq Composite   registered annual gains of 33 percent. Japanese stocks finished the year 29 percent higher. The S&P 500 rocketed by roughly 26 percent, driven by exploding prices of the “magnificent seven” – the largest companies in the S&P 500 –, which, by the way, had lost almost half of their value in 2022. Eurozone equities also had a very good run: the EuroStoxx 50 was up roughly 23 percent. The downside of this development: prices have already gained so much that, almost across the board, we currently see only little upside potential.
    • European second-tier stocks are among the few exceptions: their performance has clearly lagged behind blue chips over the past two years. “Small- to mid-caps are valued at their cheapest level in 15 years,” Philipp Schweneke, Co-head European Equities, states. Market participants tend to punish these stocks in times of higher inflation rates. One of the reasons is their assumption that due to higher debt, small caps are more vulnerable in these constellations. But this is a myth. Schweneke: “In Europe, small- to mid-caps are in fact less indebted than blue chips. Even with a view to expected earnings growth for 2024 and 2025, small and mid-caps clearly outdo large caps.” Currently, there is a whole range of extremely interesting stocks with robust growth and moderate valuations.

    668 billion

    kilowatt hours the electricity to be supplied by wind and solar in the United States in 2024. Electricity generated from solar and wind systems will thus surpass power produced by burning coal for the first time. [2]

    Philipp Schweneke

    Head of Investment Strategy Equity

    Magnificent Seven” the big winners once again

    Performance of major stock markets in the past twelve months

    Market Outlook 1 Updated .png

    Source: DWS Investment GmbH, as of end of December 2023. Past performance is not indicative of future results.

     

    Equities USA

    Hardly any impetus expected for U.S. equities

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    • This year, consumption might somewhat falter in the United States, since recent tailwinds from wage growth could wane – as well as excess savings.
    • Earnings of the corporations represented in the S&P 500 are expected to move rather sideways in the current year. Against the background of the price rally of the past few week, there seems to be little room for substantial price jumps.

     

    Equities Germany

    Very good investment year of 2023 limits opportunities in the current year

    orange orange - en (1).png 
    • The German economy is currently lacking momentum. The most recent purchasing managers’ indices for industry and services of 47.4 points are below the growth threshold of 50 points. A silver lining: export figures of November turned in surprisingly well – up 3.7 percent.
    • Despite this weakness, Germany’s leading Dax index has performed very well in December, providing investors with annual gains of 19 percent. At current price levels, we see hardly any potential for further price increases at the moment

     

    Equities Europe

    Prices have already had a good run

    green orange - en (1).png
    • The economy in Europe is expected to show little momentum in 2024. Leading indicators are pointing this way, and also the reporting season in the third quarter of 2023 was mixed.
    • After the price rally in December, blue chips had already reached a level we had expected by the end of 2024.
    • European small- to mid-caps currently offer the highest potential in our view. There are still many sound corporations among them with catch-up potential.

     

    Equities Emerging Markets

    Selection remains key

    orange orange - en (1).png
    • The performance of emerging market equities differed widely last year, depending on the region: Latin American stocks performed exceptionally well, with the MSCI Latin America gaining 33.52 percent. Asian stocks, in their turn, showed a rather sluggish performance with gains of 6.2 percent.
    • We are more constructive on Asian equities again in the current year, although there are still a couple of question marks with a view to China. Selected stocks from the sectors of consumption, technology and finances could offer opportunities.

    Markets might currently be overoptimistic with a view to rate cuts

    #3 Fixed Income

    • Material current yields were the game   changer of 2023 for bonds. Two-year   Treasuries temporarily yielded five percent,   U.S. high yield bonds ten percent. Towards   the end of 2023, yields fell quite abruptly.   Oliver Eichmann, Head of Rates Fixed Income   EMEA, states the following reasons: firstly,   inflation data in the United States and in Europe turned out to be lower than many market participants had expected. Secondly, central banks such as the U.S. Federal Reserve and the European Central Bank (ECB) signalled that the hiking cycle could come to an end.
    • “I think that the optimism discounted with a view to rate cuts was too high on the bond markets – temporarily, 1.5 percent had been priced in for the ECB by the end of 2024. Our expectations are key interest rate cuts by 0.75 percent by the end of this year,” Eichmann states. Markets might therefore make some downward corrections in the next few weeks. In the short term, he also cautions investors with a view to high-yield bonds. Recently, yield spreads over sovereign bonds have narrowed somewhat too excessively and might widen again

    Olvier Eichmann

    Sovereign bonds – yield highs are over

    Development of ten-year sovereign bond yields since the beginning of 2023

    Market outlook updated 2.png

    Source: DWS Investment GmbH, as of end of December 2023

     

    U.S. government bonds (10 years)

    Yield decline seems to be stopped

    orange green - en (3).png
    • Ten-year U.S. government bond yields have stabilized somewhat at four percent, after a sharp fall at the end of 2023.
    • Still, two-year Treasuries yielding roughly 4.4 percent appear to be more interesting.

       

      German government bonds (10 years)

      Bunds less attractive than U.S. Treasuries

      orange red - en (2).png
      • The yield slide of ten-year Bunds appears to be over, too.
      • Two-year Bund yields are a little bit higher at 2.5 percent but are way behind their U.S. counterparts

       

      Emerging market sovereign bonds

      Yield advantage over bonds from industrial nations

      orange orange - en (1).png
      • Sovereign bonds from emerging markets provided investors with yields of roughly eleven percent last year.
      • The outlook is moderately positive although in the short run, yields are rather expected to rise resulting in lower prices.

       

      Credit

      Investment Grade

      USA
      Eurozone
      red green - en (3).png
      		 green green - en (3).png

       

      High Yield

      USA
      Eurozone
      Orange_Mittel.png red green - en (3).png



      Little further revaluation potential left for the euro

      #4 Currencies

      orange red - en (2).png
      • The Fed’s higher interest rates should support the dollar. There are no indications that the European Central Bank will pursue a more restrictive monetary policy than the Federal Reserve as long as inflation is receding in the Eurozone.
      • This means that the dollar is expected to remain strong versus the euro, putting an end to the revaluation of the European common currency of the past three months.

      Gold price could continue to rise

      #5 Alternative assets

      orange green - en (3).png
      • In the past few weeks, the gold price weakened somewhat in the face of rising U.S. yields and a stronger dollar.
      • We consider the prospects of the precious metal to be good and see further upside potential, among other things due to the rate cuts expected this year.

      Legend

      The strategic view by December 2024

      The indicators signal whether DWS expects the asset class in question to develop upwards, sideways or downwards. They indicate both the short-term and the long-term expected earnings potential for investors.

      Source: DWS Investment GmbH; CIO Office, as of 10 January 2024
      green green - en (3).png
      • Positive return potential
      orange orange - en (1).png

      • Potential profits but also risk of loss rather limited
      red red - en (2).png
      • Negative return potential

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      1. Source: Reuters, 02 Jan 2024, Germany's 2023 renewable power installations hit record, but wind sector lags

      2. Source: Bloomberg, 13 Dec 2023

      CIO View