Fast reading
- As the global economy downshifts into a lower growth mode, Federated Hermes’ CIO for Equities believes the time for stock pickers may have arrived.
- Both equity and bond markets rallied towards the end of last year on hopes that central banks are close to the end of their tightening cycles.
- Even so, US inflation came in higher than expected in December, dampening expectations that rates will fall in the first quarter of 2024.
Dispersion may return to the fore in 2024 as an investment theme as stock pickers once more find breathing space for uncorrelated returns.
That’s the view of Stephen Auth, Chief Investment Officer for Equities at Federated Hermes, on the back of rallies in both equity and bond markets towards the end of last year.
The S&P 500 experienced a year-end rally, surging by 16%1 and blowing through Federated Hermes’ ‘optimistic’ full-year target of 4,600.
“What really excites us about the market opportunity in 2024 are the stocks beneath the surface of not just the S&P, but even the value and international indices,” he says. “In fact, it’s precisely in those areas, starved of investor capital as everyone moved all their chips onto the Magnificent Seven, that individual bargains are truly to be had. There are many well-diversified, stable market-leading businesses that have simply been ignored as the market tides all went in a single direction.”
For Auth, the opportunity set is a broad one, spanning multiple asset classes and geographies.
“Whether it be in financials, health care, even tech, utilities, Japan, emerging markets, I’ve rarely seen this many good ideas coming to the surface,” he says. Right now, I’m feeling pretty good about what’s in store for old-fashioned stock picking in 2024.”
Figure 1: The equities santa rally
Figure 2: Bonds also took part
Don’t get ahead of yourself
Despite the recent market rallies, other factors argue in favour of tempering enthusiasm with a note of caution on the outlook for the coming year.
That’s the view of Mark Sherlock, Head of US Equities, Federated Hermes Limited after data released on Thursday revealed US CPI for the year to December was higher than expected, reaching 3.4%2. US core CPI, which strips out food and energy prices, likewise, rose 0.3% for the month and 3.9% from last December (Figure 2, below), slightly lower than the 4% figure for November but still marginally higher than forecast.
“This will be a disappointing print for those investors anticipating a full six rate cuts in 2024 and suggests the market may have got ahead of itself in declaring the battle with inflation over,” says Sherlock. “The Fed has always maintained they are data dependent, and they are said to be keen to avoid the mistakes of the 1970s (when rates were cut too early and the US economy suffered a second, more painful round of inflation). Today’s data will not force their hand to start cutting rates quite yet,” he says.
Figure 3: US CPI edged higher in December
Geopolitical tensions are adding to the mix, with the ongoing conflict in Gaza and concerns around the safety of shipping through the Straits of Hormuz increasing the risk of supply chain disruption and a rise in oil prices. West Texas Intermediate (a proxy for global oil prices) rose to more than US$73 a barrel yesterday in response.
Figure 3: Oil prices jumped on Thursday
To hear more from our investment team, please read our 2024 Outlooks.
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1 Bloomberg, as at December 2023.
2 U.S. Bureau of Labour Statistics, as at 11 January 2024.
