By Silvano Grimaldi, CEO of the independent asset management firm Grimaldi & Partners AG.
Zurich — A review of 2023 and an outlook for the new stock-market year 2024. Will this year, shaped by the US presidential election, end positively? Which risks and opportunities should investors consider? Silvano Grimaldi, CEO of the independent Swiss asset management firm Grimaldi & Partners AG, answers these questions.
Patient Equity Investors Were Rewarded in 2023
Repeated statements by the Federal Reserve, European Central Bank and Swiss National Bank that policy interest rates would remain high for an extended period led to falling equity prices and rising yields on government and corporate bonds.
Investors reacted to these higher yields by increasing the proportion of government and corporate bonds within their portfolios.
Because the market for CHF-denominated bonds is relatively small, many investors seeking higher yields also selected bonds denominated in US dollars or euros.
However, the continued decline in inflation rates and the resulting market expectations of forthcoming policy-rate reductions by the Fed, ECB and SNB led to significant gains in both equity and bond prices during the final weeks of the year.
As a result, the potential return advantage of equities compared with government and corporate bonds once again became considerably greater.
For patient investors who maintained their equity allocations despite the investment recommendations that had prevailed for a long period, this approach ultimately proved rewarding at the end of the year.
What Developments Can Be Expected in the First Months of 2024?
Central banks remain somewhat uncertain about future developments in economic growth and inflation.
So far, the policy-rate increases implemented by central banks appear to have affected the real economy significantly in only a few areas.
In particular, private consumption and labour markets have shown relatively limited effects from higher interest rates.
Central banks remain especially concerned that continued wage growth could generate further inflationary pressure.
As long as consumer-price inflation in the United States, the eurozone and Switzerland remains above the central banks’ target levels, the Fed, ECB and SNB are therefore likely to continue extending their pauses in interest-rate increases.
The policy-rate reductions expected for 2024 have already been largely priced into financial markets.
Equity prices are therefore unlikely to make significant gains immediately.
Further increases may occur only after the first policy-rate cuts, potentially relatively early in the year, and once consumer confidence regarding future economic developments begins to improve.
Growing signs of a noticeable slowdown in overall economic activity support the case for forthcoming interest-rate reductions.
The Federal Reserve now expects more substantial rate cuts in 2024 than previously anticipated. A median policy rate of approximately 4.6% is currently expected.
Clearer signs of economic weakness are also emerging in the eurozone and Switzerland. Policy-rate reductions are therefore likely in both currency regions during the year.
Lower interest rates should support an economic recovery in the United States, the eurozone and Switzerland.
Higher gross domestic product growth rates can therefore be expected in these economies as the year progresses.
In addition, the global economy currently appears to be developing more favourably than previously forecast.
A major reason for this assessment is that the global economy could benefit considerably from the emerging recovery in China and in emerging economies closely connected to the country.
Investors Should Continue to Favour Equities in 2024
The downward trend in bond yields is likely to continue during the new year.
Even if inflation continues to decline, government bonds are expected to remain relatively unattractive from a return perspective.
Some investors may nevertheless select high-yield bonds issued by borrowers considered to have a low probability of default for diversification purposes.
Investors should also consider the return-reducing costs associated with hedging bonds not traded in Swiss francs against currency losses.
Returns generated through equity-price appreciation and distributions are generally considerably higher than those available from bonds.
Investors who wait until the economic recovery becomes clearly visible in published data before purchasing equities will almost certainly miss opportunities.
Alongside supportive monetary policy, corporate earnings will remain one of the main drivers of equity prices in 2024.
Most earnings estimates for the year have remained broadly unchanged and continue to appear promising.
The US presidential election could also have a positive influence on financial markets.
President Biden’s administration is likely to attempt to prevent a possible economic downturn during the first months of the year.
If the economic outlook improves significantly towards the end of 2024 and the direction of US policy becomes clearer following the election, equity prices could reach substantially higher levels.
The expected gains in equity markets could also be supported by the large amounts of capital currently invested in short-term money-market instruments in the United States, the eurozone and Switzerland.
A considerable proportion of this capital could eventually be reinvested in equities.
Conclusion
Selectively chosen shares of US companies may remain attractive despite the associated currency risk.
This is particularly true for successful technology companies such as Alphabet and NVIDIA.
However, Europe also has highly successful companies within this sector, including SAP and Siemens.
Because of their comparatively low price-to-earnings ratios, European equity markets may offer greater potential for capital gains.
From a risk-return perspective, Swiss quality shares appear particularly attractive.
Many Swiss companies are well diversified and hold strong positions within their respective markets.
Their development is often influenced more by the global economy than by conditions within the domestic Swiss economy.
Earnings forecasts for many of these companies remain exceptionally strong for the coming months, partly because of their robust profit margins. In many cases, purchasing costs have declined more significantly than selling prices.
High shareholder distributions can therefore also be expected in 2024.
Switzerland continues to have a large number of companies whose shares offer attractive dividend yields without placing the long-term financial stability of those companies at risk.
Investors should continue to invest in shares of such businesses, even if their prices have already increased somewhat recently.
Disclaimer
This article does not constitute an invitation to buy or sell any of the securities mentioned.
All investment decisions remain the responsibility of the investor. Before investing in individual shares or other financial products, we recommend seeking comprehensive advice from a qualified professional.
