Wilsons Advisory favours global stocks for 2024 gains
Wilsons Advisory sees a constructive global backdrop for shares heading into 2024 but a neutral year ahead for local stocks.
Wilsons Advisory sees a constructive global backdrop for stocks heading into 2024.
Led by the tech-heavy US market, global equities have delivered strong returns this year. The US economy and corporate earnings have been better than feared.
Economic resilience has kept interest rates elevated, but inflation is falling sharply, buoying hopes that the Fed is done lifting rates and is likely to start a significant rate cutting cycle next year.
Futures now imply that there will be six 25-basis-point cuts in the Fed funds rate, lowering the target range to 3.75-4 per cent, from the current 5.25-5.5 per cent.
US economic data has recently shown evidence of cooling, while earnings estimates are holding up.
“Our central case expectation of a further decline in global inflation, slower but still positive growth and the prospect of central bank rate cuts should provide a supportive backdrop for both equities and fixed interest in 2024,” Wilsons Advisory equity strategist David Cassidy says.
The key risk that he is monitoring now is whether the global economy and earnings cycle deteriorate more than his central case over the coming year.
In line with an emerging consensus view, Wilsons Advisory expects the US labour market will avoid a “recessionary deterioration”, which would be part of any broad definition of a recession.
Despite a slowdown in consumer spending, low unemployment and increasing real incomes are expected to keep consumption growth in positive territory.
The interplay between the US jobs market and consumers, which make up 70 per cent of the US economy, will obviously be crucial to whether the US continues to avoid a recession.
His central case is that mid-single-digit earnings growth in the US will be achievable.
US valuations aren’t cheap, but company quality is high, so the medium to longer-term growth prospects for US equities “continue to look attractive”.
“Valuations look reasonable when calibrated against the US stockmarket’s historical and prospective earnings growth,” Cassidy says.
The expected interest rate cuts over the coming 12 months should also ease valuation concerns, but his central case is for flat rather than expanding US equity multiples, which would “see a more moderate return profile in 2024 relative to 2023”.
The narrowness of gains behind the 25 per cent rise in the US equity market this year was partly “cautionary”. After all, the market was until recently leaning towards a recession.
In that regard, the broadening of the gains in the past two months has been encouraging.
Cassidy says the prospect of a Fed easing cycle kicking in next year has the potential to foster an even broader advance over the coming year, provided economic growth stays positive.
Outside the US, valuations are generally “less demanding”, although the “structural earnings growth prospects are generally less strong”, and “cyclical growth risks are higher”, particularly in Europe.
With European growth close to stagnating and Germany now in outright recession, the European Central Bank may cut rates sooner than the Fed, aided by the rapid fall in inflation across the region, even though ECB president Christine Lagarde has recently rejected the possibility of rate cuts.
If the ECB cuts in the first half of 2024, it may give at least a short-term boost to eurozone equity prices and prompt euro weakness. Cassidy says if the ECB cuts fast enough, it may even avert an outright recession, but it’s unlikely to drive a significant acceleration in growth next year.
Hence, he retains a preference for the defensive quality growth on offer in the US equity market.
Emerging markets have been a major disappointment this year, with the Chinese market down about 14 per cent, but the region offers attractive growth at cheap valuations.
Cassidy says a weakening trend in the US dollar should help emerging markets (EM) assets.
“The Chinese economy appears to have bottomed out, although investor sentiment towards China remains very cautious,” he says. “We believe EM can outperform developed markets in 2024.”
The Australian market has had a more subdued year due to its underweight exposure to tech, overweight exposure to banks and uncertainty around the inflation and interest rate outlook.
Cassidy still thinks global shares will outperform Australian shares on a six-month view, though the prospect of a further revival in the Australian dollar may crimp the global outperformance. He recommends at least a partial currency hedge on global equities.
“While the recent cooling in local inflation and growth data has lifted the equity market in recent weeks, Australia likely needs more confidence that a Reserve Bank easing cycle is commencing before the market can break free of its current trading range,” Cassidy says. “The path of inflation in 2024 will be critical, with the fourth quarter 2023 inflation data due on January 31 a key signpost on the path to lower policy rates.”
A stronger resource sector performance, based on improved sentiment towards the Chinese economy, could help.
Then again, the prospect of an overall slower year for global growth may well keep a lid on commodity prices.
Overall, Cassidy is neutral on the Australian stockmarket.
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