Introducing Investment Viewpoint – concise market updates direct from our experts

Written by Bernard Swords, Chief Investment Officer, and Elizabeth Geoghegan, Head of Fixed Income Strategy

15 January 2024

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Equity markets with Bernard Swords, Chief Investment Officer

Despite the US election, will there be a strong recovery for healthcare stocks in 2024?

Last year was a strong one for equity markets – and our equity portfolios delivered an appreciable level of outperformance. However, the healthcare sector underperformed in 2023, and that was our biggest overweight. We still like this sector for 2024 – here’s why.

The aftereffects of Covid-19 – a continued slowdown in sales for the beneficiaries and capacity and supply issues for the losers – appear to have waned, according to what companies said at the end of last year. This will be particularly helpful to the medical devices group who have barely shown any growth over the last couple of years as hospital and staffing capacity was constrained.

  • As a result, the sector is expected to deliver earnings growth of about 14% over the next couple of years. The only other sector expected to deliver stronger growth is IT, but its valuation is 50% higher.
  • The sector’s valuation is slightly lower than its long-term average, but this is an election year in the US and the sector can be used as a ‘political football’. Consequently, we would not penicil in anything for revaluation, with strong earnings growth delivering the outperformance.
  • In 2024, we will be altering the mix of our Healthcare holdings somewhat, increasing our exposure to the medical devices industry. It is the group which is most exposed to the theme of aging demographics. With the Covid impacts passing, this industry stands to gain most within the sector – and it is immune from the impact of any political debates in the US. What could undermine it is a significant deterioration in the labour market.

Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy

A rate cut by the ECB is priced in for March – will it happen?

Recently, there has been a huge move in terms of the number of interest rate cuts that markets have priced in for 2024. In the US, six interest rate cuts are expected for the year ahead, the first of which is expected in March. 

The first rate cut by the European Central Bank (ECB) is also priced in for March. Sure, inflation is falling but there are a few hurdles that we think argue against a March cut in quite a meaningful way. Here’s why.

Firstly, inflation is still above target at 3.4%. Unlike the US where the Federal Reserve also must consider the labour market, the ECB only has one mandate to keep inflation and price levels stable, with an inflation target of 2%.

  • They are also waiting on wage negotiation data which will take some time before it is released in Q1, but the latest data last week continues to highlight the strength of the euro labour market, with eurozone unemployment hitting 6.4% – the lowest level since the creation of the euro.
And finally, a big hurdle: the ECB has never been the first mover in terms of central bank actions.

The week ahead: what to watch out for

This week, we get the inflation figure for the euro area. The focus will be on whether the pace of core inflation's deceleration can be maintained. In the US, retail sales will be released which will update us on the health of the US consumer. We have already seen one of the major investment banks increase its forecast for growth in the US due to greater consumer resilience. Could this become a pattern?
It is the start of the fourth quarter results season, and we will be watching to see what companies are saying about the year ahead and if they will be changing their guidance. Economists are calling for a slowing in the US economy in the early part of the year. Will companies be seeing this in their order books?
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