ABN AMRO MeesPierson: market volatility offers investment opportunities in 2024

• Subdued economic growth in 2024; bank enters new year with neutral equities view

• Periods of market volatility offer opportunities, including in specific sectors

• High-quality bonds set to benefit from expected interest-rate cuts

Subdued economic growth projections for 2024 hold little cheer for equities. At the same time, there is no real reason to fret either, as a 2024 recession is unlikely. Periods of market volatility may offer opportunities for equity investors in the year ahead, while bond investors should benefit from lower interest rates, ABN AMRO MeesPierson concludes in its 2024 Investment Strategy Report ‘Looking for opportunities in 2024’, out today (link).

Patchy economic growth

Ralph Wessels, ABN AMRO MeesPierson’s Chief Investment Strategist, says: “Economic growth will be patchy in 2024, with Europe’s expected to be well below 1%. The US economy will probably do better than its European counterpart, but even here the picture is far from convincing. US growth is expected to be below trend because of the pressures of higher interest rates and some positive factors losing momentum. China’s economy failed to live up to high expectations in 2023 and the country will continue to face headwinds in 2024. Hence our neutral take on equities as an investment class.”

Opportunities for equity investors

To contain high inflation, central banks have significantly bumped up interest rates, putting the brakes on economic growth and thereby also on corporate earnings development. Although it reckons the hiking cycle has now run its course, ABN AMRO MeesPierson points out that the economic impact of these interest rate hikes has yet to fully percolate through. As Wessels notes: “In the first six months of 2024 in particular, growth is likely to be subdued. And we believe earnings growth expectations for 2024 are too optimistic as they stand. Uncertainties over corporate earnings are liable to cause market volatility in the months ahead.”

For equity investors, periods of market volatility may well bring opportunities, ABN AMRO MeesPierson reckons. It notes that equity valuations are not overly demanding at the moment; in fact, valuations are even below their long-term averages in most regional equity markets. What’s more, ABN AMRO MeesPierson predicts a modest recovery in growth in the second half of 2024. Wessels says: “When opportunities arise, we’ll adjust our positioning accordingly. For now, we’re sticking to our neutral take on equities, with a slightly defensive tilt. Among the developed markets we prefer the US over Europe, as we believe the US economy is more resilient to a global slowdown than Europe’s economy is. In terms of sectors, we take a positive view of health care – a defensive sector – and of information technology, which is still looking at robust earnings growth prospects.”

Bonds should benefit when central banks ease off the brakes

Low economic growth and falling inflation should enable central banks to take their feet off the brakes, ABN AMRO MeesPierson observes. It expects the US Federal Reserve (Fed) and the European Central Bank (ECB) to embark on interest rate cuts as 2024 progresses. This should make the outlook for bonds a lot more benign after a few tough years.

ABN AMRO MeesPierson expects bonds to be quite an attractive asset class going forward, even if interest rates remain unchanged. And if central banks do indeed cut interest rates in 2024, as the bank predicts, bond yields could move higher. Wessels comments: “The best way for investors to anticipate interest rate falls is to go for slightly higher durations (interest rate sensitivity) in their portfolios. We’d recommend opting for high-quality bonds, such as government loans and investment-grade corporate bonds, as we feel it’s too early to turn bullish on riskier bond categories such as high-yield paper.”

Currencies: euro staying in range relative to US dollar

The ECB’s and Fed’s monetary policies in 2024 will also affect the exchange rate of the euro versus the US dollar (EUR/USD). ABN AMRO MeesPierson expects both central banks to ease monetary policy in equal measure, with the EUR/USD rate continuing to move within its current range of 1.05-1.10 unless and until another directional trigger emerges.

Geopolitical risks demand vigilance but do not determine market trend

ABN AMRO MeesPierson sees some risks in 2024 in the political and geopolitical arena, pointing to the wars in Ukraine and the Middle East, as well as the US presidential elections in November 2024. Although geopolitics and other political developments are matters to watch, they tend not to have long-lasting effects on global financial markets, the bank argues. In fact, their impact is mostly short-lived or restricted to specific regions or sectors, which could well open up opportunities for investors.