Equity strategy and market outlook – January 2024

Alastair George believes that global equity markets have started 2024 in a volatile manner, with a mixed performance across regions. 2023’s pattern of US and Japanese outperformance combined with China’s stock market underperformance has continued. From a sector perspective, basic industries have lagged other sectors, given concerns over prospects for China’s growth, followed by utilities, which have suffered from the reversal of December’s declines in global bond yields. January’s reversal in global bond markets follows Q423’s extraordinary rally. This may have spooked central bank policymakers into guiding markets to moderate expectations for early interest rate cuts. Nevertheless, currently US 10-year Treasury bonds yield 4.1%, down 100bp from the high of 5% recorded in mid-October, which represents a significant easing of financial conditions. Geopolitical risks are not diminishing. The market reaction to events in Gaza has been modest to date and the war in Ukraine is for now perceived by markets as a static regional conflict. Success in diversifying energy supplies in Europe means stable energy markets and investors have become insensitive to the risks. Nevertheless, escalation in either Ukraine or the Middle East could disrupt energy markets and supply chains, potentially rekindling inflation. Notably, shipping in the Red Sea remains disrupted. Investors start 2024 with a solid foundation in terms of the outlook for US interest rates and long-term government bonds. We maintain a neutral outlook on global equity markets following the rally of Q423 as equity valuations have risen in tandem with declining bond yields. US equity markets appear to be fully priced at present and we expect upward revisions to earnings estimates will be required to sustain the current market momentum.

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