As we slide into this new year, let us drop a few facts: three “wild cards” for the 2024 cycle.
First, inflation – While driven by different factors in the US, Europe, Switzerland, it is in check and the consensus is that it will likely settle. Which does not elude hedging against it: differently from the previous decade, inflation will likely stabilize at higher levels, and it is not certain for how long. The new world order of multi-polarity in geopolitics may also trigger structural economic factors still at test alongside eased but persistent supply chain strains.
Second, growth data – The cost of capital grew exponentially in the last 18 months, making this data the real “wild card” for 2024, especially for equities, and indirectly for economic growth. Focusing on equities, solidity of firms fundamentals such as costs and funding structure, business profits sustainability and basis for growth, are increasingly being challenged by investors via stock valuation. Equities with strong structural fundamentals will likely be favoured thanks to their resilience in accessing capital at lower costs and to their resilience to headwinds. On the other hand, the increasing global dispersion in valuation which is 30% higher than pre-pandemic average, signals additionally that strong fundamentals for growth will continue to be a pivot. S&P top 7 stocks are an example on point, particularly boosted by Artificial Intelligence, seemingly the real disruptive force and probably the fastest and more concrete change in the near future.
Third, rates expectations – With labour market continuing to be resilient, inflation in check, insofar marginal credit events and conflicts not infectious beyond eruption borders, global growth is persisting albeit expected to slow down, at consensus shy of 3% year-over-year. For Switzerland, growth is forecasted to stay sturdily at 1%, pretty much unchanged vs 2023. External factors such as demographic risk, including displacement of millions due to climate change/extreme weather events, decarbonization, persistent conflicts, are all inflationary forces, for which complacency should not be an option. Inequality continues to increase across the developed world, with the risk of misinformation, disinformation and cyber insecurity ranking amongst the highest perceived concerns. With all of this under the sun, the consensus is for rates to have reached their peak, with easing ahead in 2024. Central Banks decisions and even more structural country reforms will be paramount to shaping ecosystems that favour investment, trade, and not the least encourage deleveraging.
Focus is key – In equity markets, when volatility and dispersion persist, quality stocks have historically remained good performers. Also, alpha is back: as an indicator of excess return, or return over a benchmark rather than over the average. A special mention should go to Swiss private markets and for their meaningful evolution in recent years, to an extremely valuable and unique expansion of the opportunity set, managed within a network of dedicated boutique investment firms, dedicated funds, multi-family offices fully focused on preserving wealth and on creating value holistically, and in the paramount long-term perspective. Active selection focused on fundamentals, a key prerogative in private markets analysis, is currently even more important in risk and valuation assessment.
Article edited by Angela Cavezzan
Risk Manager, Financial Services
Disclaimer: This article is for information purposes only and does not constitute any investment offer or advice. This information should not be regarded as a substitute for obtaining individual advice.
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