Morgan Stanley: Difficult investment choices in 2024

Ha Eleftherius Courtalis

Investors will have to make tough choices in 2024 while paying close attention to monetary policy if they want to avoid a variety of potential risks and find opportunities in an environment where economic growth is slowing and inflation, although falling, remains high. In the investment forecast report for next year.

Markets have already recognized that central banks will make a smooth policy transition to accommodate lower levels of inflation – meaning there is limited room for upside in equity valuations. However, 2024 should be a good year for bond investing, as strategists at Morgan Stanley see big opportunities in high-quality bonds and developed market bonds, among others.

Morgan Stanley stresses that central banks will need to strike the right balance between sufficient tightening and easing quickly enough. Investors in 2024 should seriously look to discover small openings in markets that can deliver positive returns.

For economies to pass this final stage before inflation returns to “tolerable” levels, they must experience slower growth, especially in the United States, Europe and the United Kingdom. On the other hand, China’s tepid growth will weigh on emerging markets, and there is a risk that the country’s economy could be drawn into a broader deflationary debt spiral, with consequences for the rest of Asia and beyond.

Morgan Stanley expects China to avoid the worst-case scenario, and that policymakers in the United States and Europe will begin cutting interest rates in June 2024, improving the macroeconomic outlook for the second half of the year.

A tale of two halves

In 2023, equity markets performed strongly as they rebounded from recession fears that fueled the October 2022 lows, and proved more resilient than analysts expected. However, 2024 is likely to be a “tale of two halves,” with a cautious first half giving way to a stronger performance in the second half of the year, Morgan Stanley estimates.

For the first half of 2024, strategists advise investors to be patient and selective. Risks to global growth – driven by monetary policy – remain high, and headwinds to profitability may persist until early 2024 before a recovery occurs. Global stocks typically begin a sell-off in the three months before a new round of monetary easing as riskier assets begin to price in slower growth. The US bank said that if central banks remain on track to start cutting interest rates in June, global stocks could see a decline in valuations early in the year.

However, in the second half of the year, lower inflation is expected to ease monetary constraints, boosting growth. “We believe short-term uncertainty will give way to a comeback in US stocks,” says Morgan Stanley. He expects profitability growth to remain strong through 2025: “Positive operating leverage and productivity gains from AI should lead to margin expansion.”

However, during the year there will be many obstacles in the markets. In general, US stocks are likely to perform well and perform better than European or emerging market stocks. This is especially true if these economies fail to achieve a soft landing, in which case we are likely to see a shift to quality as the US outperforms.

Emerging market stocks face more headwinds, including a stronger dollar and slower growth in China, as policymakers grapple with the triple challenges of debt, demographics and deflation. These risks are exacerbated by companies’ focus on diversifying their supply chains amid geopolitical tensions and the effects of pandemic-era disruptions. However, Morgan Stanley said emerging markets could see a stronger recovery in the second half, as lower interest rates and a weaker US dollar could spur inflows.

However, the global “bright spot” for investors is high-quality bonds. Yields on a broad cross-section of US corporate and government bonds reached 6%, the highest level since 2009. US and German bond yields are at their highest levels in a decade, and Morgan Stanley expects US 10-year bond yields to return at $3.95. % and the German bond at 1.8% until the end of 2024.

Thus, for 2024 Morgan Stanley recommends overweight positions in bonds, and equal weight in stocks and cash, while it is particularly negative for commodities. In stocks in particular, it is overweight in the Japanese market, equally weighted in the United States and underweight in emerging markets.