2023 is drawing to a close and it is finally, the season to be jolly.
Hopefully the infectious enthusiasm of the season will spread to stock markets.
A trend of sustained market rallies in the last few trading days around Christmas and into the first two to three days of the New Year, has led to the concept of a Santa Claus rally among investors.
Several theories abound to explain this trend - increased holiday shopping, holiday bonuses, end-of-year tax considerations, a festive mood and institutional investors settling their books before going on vacation.
Given an expectation of higher-for-longer interest rate environement, what might investors bet on to drive the Santa Claus rally of 2023? And will we see a rally at all?
As we head into 2024, AsianInvestor asked asset managers what themes and trends are likely to dominate equity markets over the next few weeks.
The following responses have been edited for clarity and brevity.
Björn Jesch, global CIO
The Fed is done with hiking. As a result, Santa Claus has arrived early this year pushing the S&P up by 400 points since the end of October with little further market upside from here.
The current VIX of 13 and bullish AAII (American Association of Individual Investors) sentiment tell us that greed is back.
However, we remind complacent investors that we will first have to go through an economic soft patch during the coming quarters before the Fed starts cutting rates in the second quarter and the economy hopefully re-accelerates in the second half of 2024.
Therefore, we expect better entry points for equity investors during the first half of 2024.
Investors are likely to rebalance their portfolio for the new loosening cycle. They will bring back disregarded stocks on their buy-list.
We recommend not to ignore ex-US markets.
In Europe shares trade at a record discount, especially small and mid-caps, despite offering mid-single digit EPS growth and almost 4% dividend yields.
Japanese stocks should benefit from a robust economy, currency tail winds and they offer an alternative to China for investments in Asia.
Finally, renewable energy stocks have gone through a rough period in 2023, as higher interest rates hurt this capital-intensive industry. However, continued government support should bring them back on the growth track in 2024 in our view.
Georgina Cooper, portfolio manager at Newton Investment Management
BNY Mellon IM
This quarter has seen increased turbulence in markets with attention shifting away from any further imminent interest rate changes to focus more on companies’ earnings and their outlook into what could be a tougher 2024.
With earnings somewhat rebased in the last few weeks, going forward the question will be if this has been sufficient as estimates are arguably still quite high.
Against this backdrop, it is important to seek companies that have more resilient business models that should outperform on a relative basis . For example, those that offer a mission-critical product or service that will be needed through cycles or one with a high recurring revenue stream.
The fourth quarter is important for most consumer facing sectors as well as PMIs (purchasing managers’ indexes) which will help determine the continued demand for a lot of the more cyclical names and reflect the subsequent health of the economy.
If the data proves to be better than expectations, then these sectors could perform well.
Tech and some areas of healthcare have been winners this year and given the strength of these trends, they can continue into this year’s Santa Claus rally.
Mike Shiao, chief investment officer for Asia ex Japan
Asia’s economy will enjoy relative stability in the coming year and return to a normalised growth path.
India is at an inflection point for a surge in discretionary consumption, supported by a sizable consumer base, rising income levels, and the world’s largest young population.
The Indian government is actively facilitating supply chain relocation, which will strengthen the manufacturing sector.
We prefer stocks with reasonable valuations and those that are benefitting from structural trends.
In ASEAN, domestic demand remains promising, and consumption growth is supportive.
We particularly like the Philippines and Indonesia as these countries boast rapid levels of urbanisation, young demographics, and rising incomes, which will be major structural drivers of GDP growth.
We believe the Korea and Taiwan markets, which are sensitive to exports, have successfully emerged from the challenging phase of the tech cycle.
Outperformance has been narrowly linked to the artificial intelligence theme. Following this, we are more optimistic on IT handsets, laptops and DRAM and semiconductor chips.
We anticipate a transformation of consumption patterns in China, driven by the evolution of middle-class consumers.
This structural transition can give rise to new consumption patterns, open export markets, and generate increased revenues that can elevate the country’s per capita income.
These shifts in consumer behaviour will present promising investment opportunities in the next five to 10 years, particularly in the renewable energy sector, electric vehicles, and batteries.
Shannon Ahern, portfolio strategist
Global X ETFs
While we recommend placing a stronger emphasis on quality growth, it's important to note that certain themes are structurally altering the current environment, prompting us to advise strategic positioning.
Despite the strength seen in 2023, artificial intelligence and automation is set to expand rapidly in the coming years.
This was further enforced by recent earnings reports, which showed strong demand for AI chips.
As companies continue to invest in inefficiencies, this should propel the theme.
US infrastructure stands to benefit from fiscal spending tailwinds from the IIJA (Infrastructure Investment and Jobs Act) and CHIPS Act.
As of November 2023, nearly $400 billion in IIJA funding has been announced at the state level which is being directed toward over 40,000 specified projects.
Overall, spending from the two acts have the potential to translate to a 37% increase in revenue from infrastructure companies.
Spending translates to sales even in a slowing economy.
The drive for automation and digitalisation creates more of a need for cybersecurity. Additionally, persistent global conflicts could trigger increased risk for cyber intrusions.
Cyber-attacks have continued to grow, and we think the theme will see an increasing demand.
David Sekera, senior US market strategist
U.S. stocks have rallied over 10% since their late October lows at which point they were trading deep into our undervalued territory.
Following this rally, stocks are now approaching our fair value target.
Looking forward, we suspect the Santa Claus rally will run out of steam through year end.
Yet, while broad market is closing in on fair value, we advocate for an overweight allocation in value stocks, which as a group trade at a 17% discount to our fair values.
Offsetting this overweight, investors should look to underweight growth category, which has started to edge into overvalued territory.
We think now is a good time to take profits in those growth stocks that have become overbought and overvalued.
As we head into 2024, we think investors should expect to endure heightened volatility.
Although our base case is no recession, we project the rate of economic growth in the US will slow sequentially until bottoming out in third quarter 2024, thus placing significant pressure on near-term earnings growth.
Oliver Blackbourn, portfolio manager in the multi-asset team
Janus Henderson Investors
The market surge in November has perhaps complicated the potential for a year-end rally.
A shift to pricing peak interest rates has already boosted the valuations of many risk assets.
A further rally would likely require either further signs of future loosening in monetary policy, while leaving open the possibility of a hard landing, or improved expectations for economic growth and corporate earnings, without signs that this could prolong high inflation.
The first could create a more tenuous rally as recession risks could remain elevated, whereas the latter would firmly push back the timing of a slowdown.
A better fundamental outlook would likely be more supportive of cheap value stocks and smaller companies that have struggled with rising borrowing costs and weakness in the more-cyclical housing and manufacturing sectors.
However, a rally driven simply by the prospect of sooner or greater interest rate cuts, facing a soft or hard landing issue, could favour the growth stocks that have already performed well this year.
With the US consumer still a key source of global demand, all eyes will be on the US jobs report in December to see if the signs of crack in the labour market continue to widen.