Ten reasons why 2024 could be a good year for global equity investors

Global share markets performed strongly in 2023 as inflation fell and the economy remained strong, despite higher interest rates. There are some good reasons to be confident that the outlook for global equities remains attractive for long-term investors. Moreover, waiting for recent gains to unwind before investing carries its own risks.

“One of the frustrating things for people who miss the first rally in a bull market is that they wait for the big correction, and it never comes. The market just keeps climbing and climbing.”
– Martin Zweig (1942 – 2013), US financial analyst and author

What does 2024 hold for global equity investors?

Global equity markets gave investors quite a surprise in 2023. Gloomy forecasts that high interest rates would bring a global recession and earnings collapse, causing further share markets falls, proved to be well wide of the mark. A strong jobs market supported resilient consumer spending, while the normalization of goods trade helped bring a peak first in inflation and then in interest rates.

This brought lower long-term bond yields which energized global share markets, finishing the year up over 20% in Australian dollar terms. These gains were not spread evenly though, with large companies continuing to outperform small cap stocks. Returns were particularly focussed on companies aligned to quantum shifts in the market size of innovative sectors, e.g. artificial intelligence (AI) and pharmaceuticals.

Following strong returns in 2023, some investors are worried that ‘higher for longer’ interest rates will slow the global economy, impacting corporate earnings and putting recent share market gains at risk. There are ten reasons why long-term investors needn’t panic too much.

Some reasons for confidence when investing in global share markets during 2024

1. Inflation is dropping back down to target. In the US it reached 9.1% in June 2022 but has since been tracking back to its 2.0% target, reaching 3.4% in December, after trade flows eased following the pandemic and labour markets normalised.
2. Interest rates are expected to start falling later this year across the major developed economies (except Japan) as inflation eases. We may well be moving into a period when the neutral rate of interest is higher than in the last decade, but lower rates should support share prices.
3. Consumers are still spending, supporting retail sales and broader economic activity, especially in the services sector. This reflects savings accumulated during Covid, with households being less over-extended than at the end of previous economic cycles.
4. International travel is returning to normal as airlines (gradually) rebuild capacity. This supports consumer spending more broadly, especially benefitting hotel groups, live entertainment businesses and luxury goods houses.
5. The global economy is still growing. The OECD expects this to ease from a projected 2.9% in 2023 to 2.7% in 2024, before starting to re-accelerate next year. This is consistent with a soft landing as inflation returns to target levels without the need for interest rates that deliver unemployment levels high enough to crush consumer spending and business investment.
6. Generative AI is reshaping the global economy in a similar fashion to earlier adoption of the personal computer, internet and smartphone. Certain companies are seeing a quantum expansion of their total addressable markets, bringing structural shifts in earnings.
7. We have entered a new period of innovation as a broader swathe of companies exposed to electrification, automation, onshoring and medical breakthroughs invest heavily in the markets of the future. This will support near-term demand even if interest rates remain elevated and consumer spending slows for a while.
8. Last year’s equity rally was unusually narrow, bringing the opportunity for a broader share market recovery this year. This doesn’t mean that companies in the fastest growing markets became overvalued, but many stocks are yet to fully participate in the share price recovery.
9. Companies now face easier financial conditions as expectations of lower interest rates have reduced yields on longer-term bonds. As these feed through into lower borrowing costs they should support profitability and companies will start to invest more.
10. The discount at which global smaller companies are valued relative to larger stocks is at an historic high. Smaller companies can take decisions more quickly, better manage inventories, control costs and exploit new opportunities to grow earnings. This enables them to outperform as the economic recovery broadens, typically six months or so after interest rates peak.

What should investors do now?

None of this is intended to predict the near-term direction of share markets. Investors should consider their own personal circumstances, undertake their own research and seek professional advice.

Particular ongoing risks that investors should consider include:

• If inflation does not fall as expected, interest will rates remain elevated, keeping borrowing costs high and constraining expenditure, this risks a recession and weaker earnings growth
• Household savings which increased during the pandemic have supported consumer spending; economic activity may slow if this is exhausted before interest rates start to fall
• If China remains in deflation, its economy may slow further, impacting broader global economic activity and earnings growth
• Ongoing geo-political tensions in the Middle East, Taiwan and Ukraine have the potential to interrupt trade flows and energy supplies, bringing a new round of global inflation

These risks may well give rise to periods of share market volatility. However, there are solid reasons for long-term investors to have confidence that global equities can play a positive role in their portfolios.

The structural shifts in the global economy and an eventual easing of interest rates can deliver sustainable earnings growth over the medium term. These present opportunities for a broader range of assets – especially growth stocks and smaller companies – to participate in the longer-term recovery in market valuations.

Written by Investment Specialist Tim Richardson CFA