Market outlook - January 2024

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Moderate price potential for equities – high concentration in portfolios entails risks

#1 Market & Macro

In the first quarter of 2024 equities clearly turned out to be the top yield earners. Several stock market indices hit new all-time highs. The reasons are obvious: “Global economic data have been in surprisingly good shape recently. An additional factor is the unharnessed optimism around Artificial Intelligence,” Björn Jesch, Global CIO, states.
Bonds have not been able to keep up with this pace during the last three months. Uncertainty about the further path of inflation, whether it will continue to recede and do so quickly, in combination with surprisingly robust U.S. economic growth have boosted yields again so that prices have fallen. “For the majority of stock markets we have witnessed inflated valuations, i.e. higher price/earnings ratios. Price gains were thus mostly driven by declining risk premiums,” Jesch adds.
No acceleration is to be expected with a view to corporate earnings in the next twelve months. The dynamics in earnings growth should be highest in Emerging Markets and in Japan. There are currently no signs of an end to the positive momentum driving prices of mega caps. This is, however, not only good news since it has led to dangerously high concentrations in active and passive portfolios and to a very high correlation within many equity portfolios.
Main losers of this trend are small- to mid-caps which do not prosper in such an environment. Jesch adds: “Although we are still constructive on European small- to mid-caps, we have downgraded them from “strong outperform” to “outperform”. Jesch summarizes: “Against the background of their very good run up to now, our forecast for most stock markets are rather modest total returns of roughly five percent by March 2025.”

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: India as the growth champion – United States holding up well

Even if growth is slightly falling in the United States, the U.S. economy is surprisingly resilient: employment is still increasing, consumers continue to spend money though not quite as much as in the past. Our growth forecast for the current year is 1.8 percent.
Eurozone growth might, however, turn in considerably lower at 0.7 percent in 2024.
India should be the growth champion of this year – with gross domestic product rising by 6.8 percent, two percentage points more than China’s GDP (4.8 percent).

Inflation: generally falling but still very high in the services sector

Inflation rates are falling both in the United States and in the Eurozone. Eurozone core inflation, excluding the generally more volatile prices of energy and food, was at 2.9 percent in March (February: 3.1 percent). However, prices in the services sector, which are strongly driven by wage growth, continue to rise fast at 4.0 percent.
In Germany, the inflation rate has declined to 2.2 percent in March (after 2.5% in February). Still high price rises in the services sector are also striking here – 3.7 percent in March after 3.4 percent in February.

Central banks: rate cuts expected in the United States and in the Eurozone – Japan might rather hike

What seems to be clear is that the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) will start to cut rates this year. It is, however, no longer that clear how many rate cuts will be made.
The Japanese central bank (BoJ) is an outlier here – it will probably raise interest rates to 0.25 percent by March 2025. After 17 years, the BoJ ended its period of negative rates in March, by raising its short-term interest rates to 0.1 percent.

Risks: down-side surprises from interest rates, geopolitics and consumption

We currently see three downside risks for the Eurozone: first, a delayed acceleration of private consumption. Second, a weaker global demand, and third, a further escalation of geopolitical crises.
In the United States, one risk is that interest rates stay higher than expected over a longer period of time. One reason might be economic dynamics making inflation stickier than up to now assumed by the markets.

First bright spots for value stocks

#2 Equites

Growth stocks versus value stocks – this has been an unfair battle in the last 18 years. Except for 2022, growth stocks have always taken the lead, and generally very clearly so. Currently, there seems to be a silver lining for investors in growth stocks, i.e. corporations with generally low price-to-book ratios, comparably high dividend yields and a low price/earnings ratio.
“In the past few weeks, we have witnessed a relative recovery of value stocks, particularly since big tech stocks could not keep up their momentum,” portfolio manager Jarrid Klug explains. The reasons: economic data beating expectations recently and the resulting lower probability of a recession. However, Klug does not expect the predominance of growth stocks being now a matter of the past.
“This year up to now, performance on the global stock market has again been dominated by corporations linked to a strong position in the mega trend topic of Artificial Intelligence,” Klug states. But a permanently strong U.S. economy could contribute to a better performance of value stocks, particularly since the valuation discount of value stocks versus the market continues to be very high. “Moreover, high valuation differences on the market tend to be a good stock-picking environment for value stocks, i.e. the clever selection of the most promising individual papers,” Klug continues.
Recently, there have been more positive news from classic value sectors such as the financial, health, industrial and energy sectors. Should rates be cut less than currently expected, this could have a positive effect on the profit situation of European banks, which are additionally valued very cheaply.
Even in the auto sector, which is often viewed critically, profits do not seem to have slumped as drastically as implied by low valuations. In the badly battered chemical sector, there are first signs of improving new orders, and in U.S construction, activities are picking up speed, amid still high interest rates.
As to regions, Klug prefers European value stocks versus their U.S. counterparts, since, on average, the latter continue to be rather expensive. However, European companies must manage to boost their earnings growth in order to attract more attention from investors.

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

Value stocks in low demand in the last few years

Relative performance of value versus growth stocks

^{Source: DWS Investment GmbH, as of March 2024}

Equities USA

moderate price potential

U.S. economic prospects have improved of late. We no longer expect a recession.
Currently, we only see moderate price potential. Valuations, i.e. the price/earnings ratio, could increase a little bit further. This might have been triggered by a kind of “digital PER premium” due to the stronger weighting of tech stocks.

Equities Germany

expected acceleration of the global economy should support prices

We expect a recovery of the global economy towards the end of this year. Among the winners should be German corporations, which heavily depend on the economic cycle and exports.
The price recovery of the first quarter (plus ten percent) suffered a slight setback at the beginning of April. However, we do see some potential for slightly rising prices as of March 2025.

Equities Europe

catchup potential versus U.S. equities

We continue to be constructive on European equities. The earnings situation of European corporations has improved in the last two years. The gap between European corporations and their U.S. counterparts with a view to earnings growth is expected to narrow.
However, this has not yet found its way into valuations. The valuation discount of European versus U.S. stocks continues to be well above average.

Equities Emerging Markets

Still a question mark on China

Stocks from Emerging Markets should be supported by two aspects: the dollar has hardly any further scope for revaluation, and U.S. interest rates should rather fall than rise.
Although the Chinese stock market seems to have bottomed out, economic headwinds remain strong. In Asia, we currently prefer countries such as India or Indonesia.

Potentially good yield opportunities with short sovereign bonds

#3 Fixed Income

After a good fourth quarter of 2023, the first three months of 2024 have been rather mixed for investors. “The reasons are primarily an improved economic environment in the United States and inflation rates above the target of many central banks. Due to these two factors, the rate cuts expected by the market for 2024 were partly “priced out” again, and yields started to climb again,” Oliver Eichmann, Head of Fixed Income EMEA, states. However, the outlook for the nine months to come is still rather positive.
“I expect sovereign bond yields with shorter and medium maturity to fall and prices to rise, due to declining central bank rates around the middle of 2024 in the Eurozone and in the United States. Moreover, returns in most segments are rather interesting. For example, the return of a typical index for shorter euro sovereign bonds, the ICE BofA 1-3 Year Euro Government Index, is slightly above three percent.
“Based on our main scenario, we expect very interesting total returns for shorter U.S. sovereign bonds,” Eichmann states. However, euro investors should bear in mind that dollar investments carry some currency risk for them. “Over twelve months, we expect positive total returns for 2-year sovereign bonds in the Eurozone,” the fixed-income expert continues.

Olvier Eichmann

Sovereign bond yields have risen again

Development of 10-year yields

^{Source: DWS Investment GmbH, as of March 2024}

U.S. government bonds (10 years)

Yields expected to fall slightly

The yields of 10-year U.S. bonds have risen substantially in the current year, putting prices under pressure.
We expect slightly falling yields to 4.20 percent (currently 4.45 percent) by March 2025.

German government bonds (10 years)

Little potential for price gains

In the current year, 10-year Bunds record a slightly negative performance, due to higher yields.
Yields could climb a little bit higher. Our yield forecast as of March 2025: 2.6 percent (currently 2.45 percent).

Emerging market sovereign bonds

Good prospects continued

Sovereign bonds from Emerging Markets have gained approximately two percent this year, unlike most of their counterparts from industrialized countries.
Over a horizon of twelve months, we continue to be constructive on this asset class.

Credit

Investment Grade

USA	Eurozone

High Yield

USA	Eurozone

Euro/Dollar: stronger economy and higher yields should support the dollar

#4 Currencies

In the twelve months to come, the euro/dollar exchange rate should be primarily determined by diverging growth rates between the United States and the Eurozone.
The substantially better prospects of the U.S economy and high bond yields continue to support a strong dollar.

Gold: substantial price gains – prices are supported by several factors

#5 Alternative assets

A plus of roughly 11.5 percent since the start of 2024 (as of April 8), for the first time surpassing the mark of 2,300 dollars per ounce – gold is having a good run.
Factors which will continue to boost the gold price are an extraordinarily high demand from Asia and from central banks as well as increased geopolitical risks, turning the focus on gold as a crisis investment.

Legend The strategic view by March 2025 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 09 April 2024
	Positive return potential
	Potential profits but also risk of loss rather limited
	Negative return potential

Forecasts are based on assumptions, estimates, views and hypothetical models or analyses which may prove to be incorrect.