2023 was dominated by the extraordinary performance of a handful of US mega-caps. We expect 2024 to be a year of ‘vice versa markets’, when the stellar performers of last year are likely to fall back, while prospects look considerably better for some of the year’s underperformers.
Forecasts are better for emerging markets as North America’s relative fortunes decline. We expect the Bank of Japan (BoJ) to change its interest rate policy which should see the value of its languishing currency rise. And the tide could be set to turn for small and mid-caps, as they trade places with large caps.
The recovery of emerging markets
2023 saw better than expected economic improvement in the US and deterioration in emerging markets. North America’s ‘Magnificent Seven’ outperformed the MSCI All Countries World Index by an astonishing 73%. Emerging markets languished down at the other end of the performance charts, trailing global indices, with China underperforming the MSCI All Countries World Index by 28%.
We expect this theme to reverse in 2024. The US is showing early signs of peaking, the Magnificent Seven are starting to look expensive, and we give them a 10% probability of repeating their 2023 outperformance. Emerging markets tend to perform better as interest rates fall and we’re already seeing strong recovery in emerging market cyclical lead indicators. We expect emerging market earnings to recover strongly too. Falling interest rates plus re-accelerating earnings growth sets emerging markets up for a better 2024.
A resurgence of the Japanese yen
The Japanese yen is very cheap and we’re expecting it to rally this year. The value of the currency peaked in the nineties, but Japan’s negative interest rates took the yen to 50-year lows in 2023 (on a real effective exchange rate).
A change in policy should reverse the currency’s fortunes. The BoJ is the last central bank with negative interest rates and forecasters expect that to change in 2024, with profound implications for global fixed income, equities and currencies, including the yen.
Even if the BoJ doesn’t end negative interest rates, the Fed’s recent dovish pivot on rates and the BoJ’s loosening of yield curve control are both bullish signs for the yen over the year ahead. We believe that the worst of the currency’s weakness is over.
Large and small caps trade places
Large caps (above $50bn) had a strong year in 2023, with notable outperformance relative to the MSCI World index. The opposite was true for small caps, as they trailed the same index. But in 2024, that tide is set to turn. The 2023 Q4 peak for small-mid caps was driven by relative earnings and we think that’s the start of a new trend of superior relative earnings and price. Earnings and price performance is peaking for large caps and recovering for small and mid-caps.
The most likely scenario
Looking at the year ahead, we’re expecting a broadening bull market, with much better performance from emerging markets, the Japanese yen and small-mid caps. A bear market is not impossible, but for that to happen, we would have to see resurgent inflation and interest rates, or geopolitical escalation in the Middle East.
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