At the end of the year, investors take stock of what has happened during the year. At the same time, they will try to take a peek at what’s to come in the year ahead. We’ll do the same, now looking at – what can we expect from the major asset classes, based on key events that lie ahead.
But first – let’s summarize what the starting point is for these expectations.
First of all, and most importantly, we will assume that in this year 2023 we are done with the rate hike cycle and the next move will be downwards.
Secondly, we will bet on a slowdown in the global economy in the first quarter.
Third – we will assume that the first rate cut will happen after the first quarter of the year, and we will see the Fed cut rates by 75 basis points (in three 25 basis point actions).
This is currently the baseline scenario among analysts regarding the number and pace of rate cuts in the US.
And where can we look for investment opportunities?
Quite logically – first and foremost in some of the worst-performing assets of 2023. As we have seen this year, some of best-performingming assets, came specifically from the 2022 list of worst losers. Of course, we immediately make the caveat that an asset’s historical performance is no guarantee of its future performanace.
We start with black gold, because it may be where some of the biggest opportunities for investors in terms of assets in 2024 lie.
Oil has fallen nearly 13% since the start of the year, becoming one of the worst-performing commodities. But December’s weakness is fairly typical for oil prices. And it has often led to good buying opportunities for the commodity (historically).
At around $71 per barrel, oil is currently near its April low at $66.30 per barrel. The latter level was also the low end of the relatively narrow range for oil between $66 and $90 that it traded in through 2023.
A new approach to this level may be preordained by the prospect of a slowdown in the global economy. Leading this is the slowdown in China, and the prospect of a mild recession in the US in the first three months of the year. This is proving extremely unfavorable for the oil price.
Why is the oil price likely to rise in 2024?
Oil prices are expected to rise in the new year after some OPEC+ oil producers voluntarily pledged to cut output. The oil cartel stated in early December formally disapproving the production cuts. But individual countries have announced voluntary cuts totaling 2.2 million bpd for the first quarter of 2024.
Leading the cuts was OPEC’s leader and largest member Saudi Arabia. Riyadh agreed to extend its voluntary production cut of 1 million bpd – which has been in place since July – until the end of the first quarter of 2024. Russia said it would cut supplies by 300,000 bpd of crude and 200,000 bpd of petroleum products over the same period.
Iraq will cut production by 223,000 bpd, the United Arab Emirates by 163,000 bpd, Kuwait by 135,000 bpd, Kazakhstan by 82,000 bpd, Algeria by 51,000 bpd and Oman by 42,000 bpd.
Historically, the oil price has been quite volatile. Over the past 36 years, oil has gone up or down, by more than 25% in 21 of them. At the same time, there has been only one instance (between 2011 and 2013) in which the change in the price of oil has been less than 25% in three consecutive years (a gain of 8.2%, a loss of 7.1% and an appreciation of 6.9%). Given that in 2022 and 2023 the change in the oil price was again below 10% (a growth of 7.1% and a loss of 13%, respectively), there is a strong possibility of more serious volatility in 2024.
Short-term forecasts, for next year, are for an average oil price rise of 4%, among analysts. Less positive, however, are the longer-term forecasts, which call for prices of $61 per barrel for Brent in 2025, $73 per barrel for Brent in 2030, $80 in 2035, $87 in 2040, and $91 in 2045. As we have seen time and again, however, experts are not very good at making predictions, especially long-term ones.
The two most significant events for gold demand in 2023 was the collapse of Silicon Valley Bank and two other regional US banks, as well as the Hamas attack on Israel, according to the World Gold Council (WGC). It estimated that geopolitics added between 3% and 6% to gold’s performance that year.
According to the report, central bank demand has added another 10% or more to gold’s performance in 2023. The report also states that even if 2024 does not reach the same heights for the precious metal, buying above trend should still offer a further boost to the metal’s price.
The yellow metal broke $2,100 an ounce in early December before slowing slightly, and spot prices hovered around and just above $2,000 an ounce, at last count.
Gold hit another record high in the first week of December, after a tumultuous 2023. A combination of geopolitical tensions and continued central bank purchases are expected to continue to undercut it.
In its 2024 Gold Outlook report, the World Gold Council noted that many economists now expect a „soft landing“ for the U.S. economy. The Federal Reserve is likely to bring inflation back to target without triggering a recession – which would be positive for the global economy.
The industry body (which represents gold mining companies) noted that historically the soft landing environment „has not been particularly attractive for gold, resulting in flat to slightly negative expected average returns.“
„However, every cycle is different. This time, heightened geopolitical tensions in a key election year for many major economies, coupled with continued central bank buying, could provide further support for the precious metal,“ the WGC added.
Gold could reach $2,200 by the end of 2024, according to Swiss investment bank UBS. The bank’s experts also noted that the likelihood of a soft landing „is by no means certain“, while a global recession is not yet ruled out.
„This should encourage many investors to hold efficient hedges, such as gold, in their portfolios,“ WGC added.
„And in a year with major elections globally, including in the US, EU, India, and Taiwan, investors’ need for portfolio hedging is likely to be higher than normal,“ the report said, looking ahead to 2024.
All eyes on the Fed
WGC Chief Market Strategist John Reed told CNBC that gold prices are likely to remain range-bound but volatile next year. He expects them to react to individual economic data points that inform the Fed’s likely policy trajectory until the first rate cut materializes.
Currently, markets are pricing in the first 25 basis point cut in the Fed funds rate as soon as next March, according to CME Group’s FedWatch tool.
Although a rate cut is generally seen as good news for gold (as cash returns decline and savers look elsewhere for high-yielding investments), two factors could point to an underperformance of the metal.
First, if inflation cools faster than interest rates – as it is expected to – then real interest rates will remain high. And second, lower-than-expected growth could hit consumer demand for gold.
A portfolio allocation of 6% to 7% for gold would be prudent, the strategist advises.
Another supportive factor for the yellow metal in the future would be further buying by central banks, according to the World Gold Council.
Central banks have been a major source of demand in the global gold market over the past few years and 2023 is likely to be a record year. The WGC expects this to continue in 2024.
What will be the best stock markets in 2024?
You must have heard the old saying – „the last shall be first“. Of course, this doesn’t necessarily mean that the first will be last, they can stay close to the first, or in the middle!
Turning to the performance of the markets in 2023, however, there’s something that can’t help but catch our eye. Namely, the extreme underperformance of the Chinese market compared to the rest of the world’s markets. And that could give Chinese equities an edge next year. This is already being reported by many global analysts.
Goldman Sachs forecasts the MSCI China and CSI 300 to rise 12% and 15%, respectively, next year, supported by forecast earnings growth of around 10% and „moderate“ valuation gains. Both indices reached near five-year lows by mid-December.
Goldman Sachs prefers „A-shares“ (in the main Chinese market) to „H-shares“ (traded in Hong Kong) due to their lower sensitivity to geopolitical and liquidity factors.
Goldman Sachs upgraded the food and beverage sector to „overweight“ from „market-weight“ and the technology hardware sector to „overweight“ from „underweight“ in its 2024 China equity outlook.
Goldman Sachs picked China’s mass consumer market and technology, media and telecom sectors as likely winners in the ongoing rebalancing in the world’s second-largest economy next year. The political environment is expected to support these expectations.
Investors await the Third Plenum of the 20th Central Committee of the Communist Party of China. This meeting is likely to take place before the end of this year and will provide more policy guidance.
With a few weeks left in the year, the MSCI China and CSI 300 indices are headed for a third straight annual loss. Goldman Sachs noted that global mutual and hedge fund mandates are running at multi-year low allocations to Chinese equities. Even a small change next year could lead to positive market momentum.
However strategists said there are opportunities in China’s rebalancing toward sectors such as artificial intelligence and „new“ infrastructure that offer greater economic, social, and environmental improvements.
They also downgraded China’s consumer discretionary and insurance sectors to „market overweight“ from „market underweight,“ while downgrading Chinese banks to „market underweight“ from „market overweight“ because of their exposure to China’s property crisis.
The world’s leading stock indices
The strong performance of the world’s leading indices in 2023 leads many experts to expect more moderate growth in the next year 2024, especially for developed markets.
U.S. investment bank Goldman Sachs said it believes stocks will soon revert to an unattractive risk-reward ratio as the Fed is set to keep rates higher for longer. At the same time, valuations are high, earnings expectations remain too optimistic, pricing power is declining, profit margins are at risk and slowing top-line growth will continue.
The benchmark US S&P 500 index, a barometer of global stock market performance, is expected to end next year at 4,700 (in line with average analyst expectations), which would be only about 2% higher than its recent close. A possible U.S. economic slowdown or recession are among the biggest risks to the market in 2024.
European equity markets are also expected to make modest gains in 2024. Optimism that global interest rates have peaked is offset by fears that the economy could fall into recession.
The pan-European STOXX 600 benchmark, which tracks the performance of Europe’s 600 largest companies, is forecast to rise about 1 percent to 475 points by the end of next year. By comparison, its latest levels are around 471 points.
Among the indices surveyed, Japan’s Nikkei 225 and India’s BSE index are expected to continue their strong performance next year. Experts forecast the Nikkei to hit a three-decade high of 35,000 points by the end of June next year and the Indian main index to rise to new highs in 2024.
The article is analytical in nature and is not advice to buy or sell assets in the financial markets.