Our outlook for global equity markets into 2024 is cautious as earnings growth expectations are high, and the economic growth outlook is below trend. But the probability of a near-term recession appears to have declined, and earnings growth of 6%-7% seems achievable even with the normal level of forecast downgrades. Market valuations appear to discount some earnings risks. Interest rates are unlikely to present as material a challenge to valuations in 2024 as they did over the last two years.
Looking back, global equities have performed better than we anticipated in 2023, up almost 14% as we write. In our outlook last year, the consensus forecast for global earnings growth was 3% and there was an outsized probability of a recession in the developed world, which would typically drive negative earnings growth.
Much better than anticipated economic growth supported earnings, which was a major prop for equity markets. But we must also bear in mind that performance has been quite narrow. Of the 11 sector groups, four are down year-to-date and only three sectors have outperformed.
Increasing our exposure to structural growth
Through much of 2023, our preference was for economically defensive sectors which typically have dependable earnings, in particular, Healthcare and Consumer Staples. With the earnings background looking better in 2024, it makes sense to try and capture more earnings growth than one would have aimed for in 2023.
Nonetheless, there are still elevated risks around earnings forecasts and typical late-cycle growth scares should be expected. Consequently, we would have lower exposure to sectors with the most cyclical earnings (which are dependent on general economic activity), such as Materials, Energy or Banks.
It is industries and companies that are economically defensive and with structural growth where we would increase our exposure. These do benefit from a better growth background and are also helped by stable bond yields as they tend to have higher valuations.
Structural growth themes for 2024
Where is the growth we are going for? We think the Medical Devices industry is one example of this. Volumes growth is recovering to pre-Covid levels, driven by ageing populations, low penetration in emerging markets and high barriers to entry. It also doesn’t suffer from the same political scrutiny as other parts of healthcare.
The energy transition has had a few turbulent years, but it remains a long-term trend. We are increasing our exposure to decarbonisation through companies that facilitate electrification within our Industrials exposure and via Utilities.
Artificial Intelligence (AI) had a breakthrough in 2023 with the release of GPT-4. But it’s still too early to pick definitive winners and losers from AI. The valuations of many obvious participants have also moved higher, increasing risk. Hence, we have gone towards beneficiaries for the diffusion of AI rather than the product providers.
So, within our Financials and Industrial exposure, we have companies which are good businesses at reasonable valuations, but which also have intellectual property which should become more valuable using AI tools.
All considered, the background for equity markets in 2024 is looking better, with a good chance of single digit earnings growth and reasonable valuations to start. On the other side, the risk of recession is not gone; earnings growth expectations are high and at best a sub-trend growth rate in the global economy is expected. Caution is still advisable at the asset level. However, we would be more earnings growth orientated in 2024, looking for it from structural rather than cyclical drivers.
This article was originally published in the Goodbody Investment Outlook 2024: Going for (structural) growth publication on 4 December 2023. To read the full Investment Outlook publication, click here.