The next cycle of equity investing is here, and technology-related sectors will be the asset class to focus on for this decade, according to Swiss private bank Julius Baer.
Following a “turbulent year" in 2023, the bank expects 2024 to be guided by softer inflation and strong seasonality effects, which supported markets into a year-end rally in 2023. This in turn is supported by expectations that interest rates will be heading down.
However, Mark Matthews, the bank’s head of research for Asia, believes that the decline will be “pretty modest”, and will only reach a terminal rate next summer. “Global growth is slowing, we’re not going to have a recession,” says Matthews. “At least as far as we can tell, we’re looking for the first cut in the US to be in May, then after that you can see [cuts in] July, September, and then two more next year.”
Julius Baer's forecast of the central bank policy rates. Chart: Julius Baer
As such, Julius Baer believes that market sentiment should improve after a nervous start to the year. The bank is of the view that the US economy will continue to expand in 2024, although at a slower pace. This makes the backdrop for mega-capitalisation information technology stocks ripe for investments.
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To reiterate this, Julius Baer references the historical performance of the S&P 500. While most investors believe that the time to invest in technology equities is over after its rally last year, the bank’s chief investment officer and head of investment management Asia, Bhaskar Laxminarayan, notes that whenever the index makes a new high, it typically tends to keep running.
“And this is why structurally speaking, for the rest of the decade, equities are the asset class, period. We’re not saying sell all your bonds, but we’re saying that definitely from a bond versus equities [viewpoint, choose] equities, possibly as the hedge for the rest of the decade,” adds Laxminarayan.
In particular, he likes growth stocks in the technology sectors, without which the S&P 500 would have turned in a marginal performance and would not have hit the current levels. “Given that [equities] is a risk asset, you weren’t even getting 10x [returns],” he adds.
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Laxminarayan and his team also note that the performance of the S&P 500 every decade follows a similar trend, “more or less”. For the first five years, the markets will be in a state of trying to recognise a new trend — 15% of returns typically occur during this period.
Once the market consolidates and matures, the next five years will bring about 70% of returns. Taking 2020 as the start of the decade, Laxminarayan believes that the bulk of the performance is still ahead for investors.
S&P new highs. Chart: Julius Baer, Bloomberg
Therefore, the Julius Baer team is maintaining its strong conviction in the artificial intelligence (AI) theme, especially generative AI.
“Our view is that the AI race has only just started and that it will last for many years, in line with its ability to solve increasingly complex problems,” says the bank. “The theme remains attractive given the strong structural and cyclical support, and valuations remain reasonable against this backdrop. Existing investors should maintain their positions, while new investors should use temporary setbacks to build up their exposure.”
Emerging markets and Asia
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While the US will continue to remain the main investment focus for Julius Baer, the bank notes that improving market dynamics in Asia should provide attractive opportunities for emerging market equities in the second half of 2024.
India, in particular, is the bank’s highest conviction pick in emerging markets. Its structural transformation and growth trend remain intact, fuelled by a rising consumer market, a large youth population and ongoing urbanisation, which is helping to boost household spending.
On the other hand, Julius Baer is not optimistic about China as an investment theme. As investor confidence weakens in China, India has moved into a favourable position as the alternative to China. The bank remains on the sidelines on China, as it awaits the bottoming process to unfold.
Japan equities have been upgraded to “overweight” for Julius Baer since October 2023, following the shift from deflation to inflation, which it believes will benefit corporates and the broader economy. “Structural changes like corporate reforms, underweighted foreign investors, a geopolitical sweet spot and a sufficient market depth to be considered a ‘China alternative’ are still in place,” writes Kelly Chia, the bank’s deputy head of research, Asia.
Finally, the bank tilts towards US dollar-denominated investment-grade bonds, as it believes that there is still an opportunity to lock in the current attractive yields with quality bonds, since the quality segment compensates investors comfortably above expected inflation levels.
Julius Baer expects the US dollar to continue to trade within a relatively tight price range, and that commodity prices will fall at first and then trade range-bound.
