As the financial world prepares to bid farewell to 2023, many investors are eager to gain insights for the upcoming year’s investment landscape.
Peter van der Welle, strategist sustainable multiasset solutions at Robeco, told InvestorDaily that, with the new year fast approaching, the asset manager’s equity models still like technology and cyclical growth sectors and regions as well as quality stocks.
“For these assets, positive momentum could be maintained into year end. However, we see that increasingly investors risk paying too much for the undeniably brilliant AI-induced earnings growth potential of the ‘magnificent seven’ in the long run,” he said.
These so-called “magnificent seven” stocks include the industry titans Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft and Tesla.
“Relative market capitalisation of technology stocks in the US is close to previous peaks, hinting at stretched valuations. Anything may happen in the short run, but we don’t rule out the market hitting an air pocket as we enter 2024,” said Mr van der Welle.
According to Mr van der Welle, we are now in the slowdown phase of the business cycle.
Robeco is anticipating a mild recession in the G7 economies next year, marked by the end of “immaculate disinflation” and contentious elections in Taiwan, the US and Europe.
“Stock markets typically anticipate economic downturns by six to nine months, but the majority of fund managers still expect a soft landing of the US economy,” Mr van der Welle noted.
“We hold that the market is too optimistic in its expectation for double-digit EPS growth for 2024. Also, liquidity conditions could worsen on the back of a lagged impact of restrictive monetary policy and quantitative tightening. This could see reinvigorated spread decompression in junk rated debt.
“Nonetheless, opportunities are always around. We see small caps potentially outperforming the broader market when we are past the US recession trough.”
Mr van der Welle suggested that investors should carefully weigh up all aspects that matter in tactical multiasset investing during the new year.
“Soft landings are the exception, not the rule. This is not a time to chase the market higher in our view,” he argued.
“Seasonality and momentum are still positive and could herald continued positive returns for risky assets as well as for sovereign bonds into year end. However, technicals, valuation and increasingly macro data have become less supportive.
“The communication with markets by central bankers will become more challenging as the current asymmetry in their reaction function between containing inflation and mitigating a potential economic downturn disappears in 2024.”
Meanwhile, Mr van der Welle assessed that volatility is “very low” given the phase of the monetary/business cycle as well as the elevated potential for negative supply shocks emanating from geopolitical turbulence.
