GRIMALDI & PARTNERS AG: Financial markets after the winter break, what next?

By Silvano Grimaldi, CEO of the independent asset management GRIMALDI & PARTNERS AG

Zurich – Review of 2023 and outlook for the new stock market year 2024. Will this year, influenced by the US presidential elections, end positively? What risks and opportunities should investors consider this year? Silvano Grimaldi, CEO of the independent Swiss asset management Grimaldi & Partners AG, gives you answers to these questions.

Patient stock investors were rewarded in 2023

The repeated statements made by the central banks Fed, ECB and SNB that key interest rates will remain high for a long time have led to losses in share prices and rising yields on government and corporate bonds. Investors responded to the increased yields by increasing the weighting of government and corporate bonds in their portfolios. In order to achieve higher returns, many investors also opted for bonds denominated in US dollars or euros due to the relatively small market for bonds denominated in CHF.

The ongoing decline in inflation rates and the resulting market expectations of imminent reductions in key interest rates by the central banks Fed, ECB and SNB, have, however, in recent times
weeks led to significant price gains for stocks and bonds. The return advantages of stocks compared to the returns of government and corporate bonds have therefore become significantly greater again.

This paid off at the end of the year for investors who remained calm and did not reduce their equity allocations contrary to the investment recommendations that had prevailed for a long time.

What developments can be expected in the first months of 2024?

The central banks are obviously still somewhat uncertain about further developments in the economy and inflation. The central banks' key interest rate increases appear to have so far only had a noticeable impact on real economic developments in individual areas. In particular, private consumer spending and the labor markets have so far shown little impact from the increased interest rates. The central banks are particularly concerned about possible inflationary impulses from continued wage growth. As long as the consumer price indices in the USA, the Eurozone and Switzerland have not reached their target values compared to the previous year, the Fed, ECB and SNB will limit themselves to extending the interest rate holidays.

The markets have largely already priced in the reductions in key interest rates expected for 2024. Stock prices in particular are therefore unlikely to make any major jumps at first. Only after the first key interest rate cuts, which may come quite early in the year, and growing consumer confidence with regard to economic developments will share prices continue to rise.

The increasing signs of a noticeable slowdown in overall economic activity suggest that key interest rate cuts will begin soon. The Fed therefore now expects more significant interest rate cuts in 2024 than previously assumed. An average key interest rate of 4.6 percent is currently expected. Noticeable economic slowdowns are also becoming increasingly apparent in the euro zone and even in Switzerland. Therefore, reductions in key interest rates can also be expected in these two currency areas over the course of the year.

The falling interest rates will contribute to an economic recovery in the USA, the Eurozone and Switzerland. Higher GDP growth rates can therefore be expected in these economic areas over the course of the year. In addition, the global economy currently appears to be developing better than previously forecast. A key reason for this assessment is that the global economy will benefit greatly from the emerging economic recovery in China and in the emerging markets closely linked to this country.

Investors should also opt for equity investments in 2024

The falling yield trend on bonds is likely to continue in the new year. Even if inflation rates continue to fall, government bonds are likely to remain uninteresting from a yield perspective. For diversification reasons, some investors might still opt for high-yield bonds from borrowers with a perceived low risk of default. Apart from the often not notorious return-reducing costs of hedging bonds not traded in CHF against exchange rate losses, investors should note that the returns that can be achieved with stocks through price gains and distributions are usually significantly higher than with bonds.

Investors who wait to buy stocks until the economic recovery is reflected in the data will certainly miss opportunities. In addition to the monetary policy tailwind, company profits will continue to determine share prices in 2024. The majority of estimates for 2024 have remained largely unchanged and promising.

Experience shows that the US presidential elections are also likely to have a positive impact, as President Biden's government will definitely try to avoid a possible economic downturn in the US in the first few months of the year. If the economic outlook improves significantly again at the end of 2024 and there is more clarity about the course of US politics after the elections in the USA, share prices are likely to reach substantially higher levels. The expected high price increases on the stock markets are also due to the large amounts of billions currently invested in short-term money market securities in the USA, the Eurozone and also in Switzerland, which will then be reinvested in shares to a large extent.

Conclusion:

For investors, selective shares of US companies can still be attractive despite the exchange rate risk, especially stocks of prosperous companies in the technology sector, such as Alphabet, Nvidia, etc. However, there are also very successful European companies in this sector, such as SAP, Siemens, etc.

Due to the low P/E ratios, the European stock markets offer greater opportunities for price gains and, due to the risk-return ratios, especially Swiss “quality stocks”. Quite a few companies in Switzerland are well diversified and often have strong positions in their sales markets. The global economy determines the development of these companies more than the situation in the domestic economy. The profit forecasts for many of these companies are exceptionally good for the coming months, not least because of the strong margins (purchase prices have fallen many times more than sales prices). High distributions can therefore also be expected in 2024. There are still a large number of companies in Switzerland whose shares offer high dividend yields, without the distributions causing these companies long-term problems. Investors should continue to invest in shares of such companies, even if the prices have risen somewhat recently.