Private bank CIOs predict a good year ahead for both stocks and bonds

PWM's Global Asset Tracker survey finds chief investment officers expect the US to lead equity markets in 2024, though all eyes are on what the Fed does next.

While the most highly anticipated recession failed to materialise last year, global stockmarkets, driven by the US, recorded their strongest performance since 2019, supported by a huge rally in the final two months of 2023.

Gains have been mostly driven by a narrow group of US large cap companies, with stellar financial results by Nvidia, the tech firm specialising in graphics processing units (GPUs) and AI solutions, recently sparking a new powerful market surge. US, European and Japanese markets all hit all-time highs.

Today, Microsoft, Apple, Nvidia, Amazon and Google’s parent, Alphabet, account for almost a quarter of the value of the S&P 500. Together with Mark Zuckerberg’s Meta and Elon Musk’s Tesla, the so-called ‘Magnificent Seven’ enjoy a combined market cap of more than $13tn, worth more than the entire stockmarkets of the UK, Canada and Japan put together.

But what are the implications of the narrow leadership of this huge rally? Has the Fed won the inflation battle and when will it pivot? Will the economy show resilience to real rate shocks? And with increased geopolitical risk expected to fuel market volatility, how should investors position their portfolios?

These are some of the questions discussed by chief investment officers, market strategists and heads of investments at 54 private banks, managing $22tn in combined client assets, taking part in PWM’s ninth annual Global Asset Tracker survey. Conducted through January and February, the study offers insights into key asset allocation and investment intentions for the year ahead and beyond (see charts below).

Market correction

“The global economy has proven impressively resilient to substantial global interest rate hikes,” says JP Morgan Private Bank’s EMEA head of investment strategy Erik Wytenus. “The US and global consumers largely continue to spend, corporates are performing well, and inflation is under control and directionally trending downward. It’s a good recipe for a ‘soft landing’ type of scenario,” he says.

Earnings are expected to deliver the “next leg of equity market performance” over the course of 2024. “We remain healthily allocated to risk assets and see a good year for both stocks and bonds,” predicts Mr Wytenus.

His views resonate, but to varying degrees, with other private bank CIOs. More than 80 per cent believe the Fed will be able to avoid a deep recession and engineer a ‘soft-landing’. This conviction leads 40 per cent to enter the year with overweight exposure to equities. Most (60 per cent) expect US stocks to generate the most attractive risk-adjusted returns, still largely led by the Magnificent Seven, followed by Japanese and Asian ex-China equities.

“What has driven and continues to drive markets is fundamentals, and their resilience in the face of normalised interest rates, in particular corporate sector fundamentals with record high profit margins and critically record-high free cash flow generation, particularly among US tech platforms,” says Julius Baer’s group CIO Yves Bonzon.

People are watching the rise of Nvidia “in disbelief”, he says, but comparisons to the dotcom bubble are completely misleading. This is not “a remake of 1999”, when market cycle was driven by loose monetary policy and an expansion in valuation multiple, he insists.

The secular bull market in equities is set to continue, but an intermediate consolidation is on the horizon, he believes. “We are due for a correction. It's not only likely, but even welcome to restore the markets technical health.” The US presidential election in November will bring volatility, but the market will then recover and “rise to new highs in this bull market” irrespective of who becomes the new US president, believes Mr Bonzon.

While the Swiss bank is still “slightly overweight” equities, “this is not the time to chase the rally”, he says, explaining he declared the end of the bear market and the start of the bull cycle in October 2022.

Similarly, last October, when most investors were very bearish, fearing the conflict in Gaza would inflame the whole region, that oil would rise to $120 a barrel or more, and the market would resume its bear trend of 2022, he signaled a “strong buy” both for bonds and equities. A rare case when being contrarian has paid off, he explains.

“But today, the rally has been fully captured and the consensus has caught up with us. This is time for patience,” he warns, and potentially for “a little bit” of profit taking, to re-enter markets at a better entry point, in the second or third quarter of this year.

While the gap between market-based expectations for rate cuts in 2024 and the US Federal Reserve's own guidance has narrowed, and further deceleration in US inflation is expected, the amount of rate cuts does not materially change the outlook for risk assets, according to many CIOs, unless the Fed has to cut rates to counter a recession. And the decline in long term rates will be associated with a broadening of the market participation.

“We believe there's going to be a rotation over the course of this year, bringing more of the market into the uptrend,” says Marci McGregor, head of portfolio strategy, chief investment office at Bank of America Wealth Management.

The bank, which prefers US to non-US stocks, maintains a neutral stance on the tech sector. While enthusiasm around AI and innovation is a key story, which the Magnificent Seven are benefiting from, the bank has recently upgraded its weighting to US small caps. Their earnings growth is expected to “catch up”, with small caps being today “the only cheap segment”, believes Ms McGregor. Moreover, historically, they have tended to perform well after a narrow market leadership, she explains, while the reduction of financing costs, because of interest rate cuts, will also support them.

Defensive playbook

“After a year like 2023, which felt like a game of ‘Chutes and Ladders’, with rallies and corrections and then the strong rally to end the year, 2024 is going to be a good year for stocks and bonds,” believes Ms McGregor. Yet, while “encouraged by the trajectory of corporate earnings”, there are several risks to face.

“Front of mind for investors this year is going to be the Fed, and not only when they cut, how many cuts they make, but the most important part will be how they communicate and message, how they guide the market towards the pivot which will come later this year,” she says. The Fed will be cutting as a “recalibration of policy”, she says, explaining that a recession is not the bank’s base case. Geopolitical risk and the US presidential election will also contribute to market choppiness. “Overall, we have a positive bias for markets, but it may feel a little bit like a grind this year,” says Ms McGregor.

“For now, we are still expecting a slowdown to occur in 2024 – whether that is an ‘official’ recession could be a coinflip, but certainly #slowyourrroll growth,” says Amanda Agati, CIO, managing executive, investments at PNC Financial Services Group

“The market’s pricing for a ‘no landing’ scenario, that the market is just going to keep going and the economy is just going to keep on powering through, and I think that's a bit overdone.”

In line with most CIOs, Ms Agati believes it’s likely to be a “zig-zaggy” kind of year, “eking out modest positive returns by year-end as the Fed finally gets out of the way and we gain clarity on a number of longstanding issues for investors”. These include inflation, recession, interest rates, consumer spending/health and politics, among others, she says.

“A slightly defensive playbook” is recommended by Ms Agati, while encouraging investors to stay invested. This means “don’t raise a lot of extra cash and shift to the sidelines”, she advises.

In the equity space, the focus is “to lean into quality exposures, and minimum volatility type exposures, to try and create some ballast in portfolios if the market started to struggle”.

“We are starting to see more of a distinction between winners and losers, particularly with this earning season, so fundamentals are starting to matter again,” she adds.

In the bond space, the preference is for actively managed, higher quality, investment grade fixed income over below-investment grade. “In credit, this is an area we just don't feel like investors are being ‘paid’ adequately for the risk of getting a higher yield.”

Geographical rotation

While for bond markets, the central bank narrative is “incredibly important”, despite many potential risks, the macro-economic situation is largely favourable for stocks, believes BNP Paribas Wealth Management global CIO’s Edmund Shing.

Stockmarkets are being driven by “strong macro-liquidity”, he says, even though some of the central banks are reducing balance sheets. He points to the repurchase agreement (repo) the Fed introduced to support regional banks last March and the Chinese central bank’s strong injection of liquidity to support the economy. Moreover, with the economy and inflation slowing down, the US and Europe are expected to cut rates, while deflation will also push Chinese authorities to support the economy by reducing interest rates.

Equity markets are a "three-speed market", with the Magnificent Seven in the front seat, although their leadership is narrowing further, with Tesla lagging and with Apple also struggling to keep up.

What these large companies have in common is that they dominate their end markets in technology. Yet, while these stocks have been driving earnings momentum, with sales earnings having outstripped expectations, he questions whether fundamentals “power all the rise”. He points out to self-reinforcing effect, with flows into ETFs putting more and more money into the largest companies, as people invest more assets into the stockmarket, especially the US.

“This is worrying as it is getting out of hand. There is a bubble element appearing, and I do think that we are reaching extremes,” says Mr Shing. It will be difficult for these large cap companies to continue to maintain this earnings momentum, he warns.

While a rotation within the US towards mid and small caps will happen “sooner rather than later”, he also expects to see geographical rotation into “second speed” stockmarkets, including Europe and Japan, which could also enjoy strong rallies.

Profiting from “reasonable global growth”, Europe is a very open economy, its stockmarkets driven by international companies. With energy prices coming down, as well as inflation, house prices are expected to stabilise and consumption improve, supported by high and good wage growth. Moreover, with valuations still reasonable, and good dividends, European stocks are appealing for both dividends and “some growth”, he says.

Japan is also back to its 1989 peak, driven by several structural changes which are underway, while positive inflation rate allows domestic companies to raise prices for the first time in decades, improving profitability.

But the biggest challenge is to persuade investors to diversify away from the US. “Japan is a very strong story, but foreign investors have been buying a bit of it.”

Even his clients, he complains, remain underinvested in Japan, and “that’s after me talking about it for months and months and months”. The same story applies to Europe, and “very few customers” have been increasing their exposure to European stocks, while US investors have "no incentive" to buy European stocks.

Yet, investors are strongly advised not to put all their eggs in one basket, as "that rotation could still come at some point in the year," believes Mr Shing, who views LatAm, especially Mexico and Brazil, as the third area of stockmarket strength.

Portfolio diversification, across asset classes and geographies, risk management, and dynamic asset allocation remain key tenets of portfolio management, and are particularly important in an environment where geopolitical tensions around the world could threaten financial stability and exacerbate market volatility.