Horizon Q2│2024
Reading time:5 MIN
Dear readers,
Equity markets have had a surprisingly positive start to the year. After a bumpy first two to three weeks with losses of up to two percent, despite rising bond yields and diminishing expectations of interest rate cuts, there were strong price gains – remarkably driven by higher equity valuations. The robust US economy and positive fourth-quarter earnings reports in the US provided support. The results from major technology stocks have rekindled the AI euphoria. Equity markets thus appear to have moved on from the recession versus soft landing debate and are already pricing in a very favourable long-term economic and earnings outlook. This is the only way to reconcile the simultaneous rise in real yields and equity valuations. However, market breadth remains low.
How likely is this positive outlook? The risk of a hard landing for the US economy has diminished in the short term. The initially unlikely scenario that inflation can be brought down without triggering a recession is looking increasingly likely. There have been recent positive economic surprises in the US, the eurozone, Japan and China. Our economists are cautiously optimistic that the global economy will recover beginning in the second quarter. In addition, market expectations for interest rates and inflation have now become much more realistic. For 2024, only half as many rate cuts by the Fed and the ECB are priced in now than at the beginning of the year. We believe that the scope for longer-term rate cuts is limited given the structural drivers of inflation, but we expect the Fed and the ECB to cut rates towards the end of the second quarter. If this happens against the backdrop of a recovering economy, long-term bond yields are unlikely to fall much and yield curves will steepen again. A further sharp rise in valuations, especially for US equities, is then unlikely. Equity markets will therefore need higher earnings to realise further potential. If the global economy recovers and interest rates start to fall, market breadth should increase and (especially European) small caps and commodity prices should recover. Read the interview with our small and micro-cap fund manager, Peter Kraus.
However, there are many risks to this scenario (such as more persistent inflation, geopolitics). Even if it materialises, there are likely to be several obstacles along the way (such as too optimistic sentiment, high investor positioning, US elections). In the second quarter, the typically positive April seasonality and the first interest rate cuts by the Fed and the ECB, possibly in June, could continue to support markets, even if the upside potential appears limited. Then the summer seasonality and uncertainty ahead of the US elections are likely to lead to higher volatility from mid-year. Similarly high risk-adjusted return expectations across asset classes and the prevailing uncertainty make balanced positioning at the asset class level more important than before. We believe the opportunities lie beneath the surface.
Publisher
Prof. Dr. Bernd Meyer
Prof. Dr. Bernd Meyer has been Chief Investment Strategist at Berenberg Wealth and Asset Management since October 2017, where he is responsible for discretionary multi-asset strategies and wealth management mandates. Prof. Dr. Meyer was initially Head of European Equity Strategy at Deutsche Bank in Frankfurt and London and, from 2010, Head of Global Cross Asset Strategy Research at Commerzbank. In this role Prof. Dr. Meyer has received several awards. In the renowned Extel Survey from 2013 to 2017, he and his team ranked among the top three multi-asset research teams worldwide. Prof. Dr. Meyer is DVFA Investment Analyst, Chartered Financial Analyst (CFA) and guest lecturer for "Empirical Research in Finance" at the University of Trier. He has published numerous articles and two books and received three scientific awards.
Prof. Dr. Bernd Meyer
Chief Investment Strategist and Head of Multi Asset
