January 15, 2024
The first days of trading in 2024 are nothing like those at the end of 2023
The sectors that outperform are the most "defensive" and "value"
By contrast, the information technology and consumer discretionary sectors are struggling
Among emerging markets, China concentrates investor pessimism

CHART OF THE WEEK: "Equity markets’ performance since 1st January"

CHART OF THE WEEK: "Equity markets’ performance since 1st January"


What if the change of year had been a turning point for the equity market? 2024 got off to a very mixed start compared with 2023, revealing a general downward trend and very different sectoral and geographical performances (see Chart of the week). The information technology and consumer discretionary sectors, which were two of the main drivers of stock market growth last year, experienced a marked slowdown over the first nine trading days. The communication services sector was not far behind. This slowdown is the result of a readjustment in investor expectations. Against a backdrop of economic recession, rising unemployment and falling inflation are likely to alter consumer spending habits.

By contrast, healthcare is at the top of the podium. After suffering badly last year (see Fig. 2) from the rise of disruptive technological innovations and changes in public health policy, the sector is now benefiting fully from stable earnings. The other two defensive sectors, consumer staples and utilities, are also doing very well. Little affected by the crises, they are back in favour with investors looking to balance the risks in their portfolios.

Fig. 2 - Relative perf. of defensive sectors - Fig. 3 - Relative perf. of Switzerland and energy
Fig. 2 - Relative perf. of defensive sectors - Fig. 3 - Relative perf. of Switzerland and energy

Financials, which posted a modest performance in 2023, are holding up rather well. The forthcoming normalisation of monetary policy and the accompanying steepening of the yield curve should enable banks to benefit from higher interest margins. The spread between the interest they pay on deposits and the interest they earn on the loans they grant will widen and become positive again. For their part, insurers are gradually taking advantage of the high interest rate environment. The profitability of their bond investment portfolios is improving, strengthening their solvency and their ability to offer competitive products to their customers.

The energy sector continues to disappoint (see Fig. 3). Admittedly, the economic slowdown is holding back its performance, but it is buoyed by two structurally positive factors: demand is growing at a steady pace, and supply is constrained by chronic under-investment. Geopolitical tensions are exacerbating the imbalance and encouraging price rises. Companies in the sector are benefiting, and their share prices will eventually reflect this.

In the real estate sector, after a difficult 2023, the outlook remains negative. The current crisis poses a major risk to the existence of a number of players. The sector's difficulties are curbing construction activity and spreading to closely related sectors: materials and industry.

From a geographical point of view, the investment panorama is also changing, but the hierarchy does not seem to have completely reversed. Japan's Nikkei continues to grow. After an exceptional performance in 2023, the index remains on the podium in 2024. It is one of the few in positive territory. Contrary to the messages conveyed by some strategists, this is not a sign of the effectiveness of the stimulus measures, or of the robustness of the Japanese economy, but simply of the depreciation of the yen: -7% in 2023 and already -3% in 2024. Adjusted for currency effects, Japanese equities are not outperforming.

Not so for the SMI. Since the start of the year, the Swiss index has outperformed its peers. Admittedly, the Swiss franc has fallen back, but the resilience of the SMI index is mainly due to its high concentration in the healthcare and consumer staples sectors. The quality of Swiss companies' financial management also plays a key role and should enable the index to make up some of the ground lost in 2023 (see Fig. 3). Companies have strong balance sheets, with relatively low levels of debt, making them less vulnerable to economic turbulence and interest rate fluctuations.

US indices such as the S&P 500, the Dow Jones and even the Nasdaq, which had enjoyed an exceptional year in 2023, showed signs of stabilising during the first nine trading days. Investors seem to have adopted a more measured approach, after the frenzy of November and December.

Eurozone indices are failing to perform as well as their developed-country counterparts. However, the Euro Stoxx is performing well ahead of the emerging countries, whose start to the year is looking like a nightmare. Among them, the hierarchy is similar to that of 2023: India and Brazil at the top, China at the bottom. The CSI 300 remains under pressure due to trade tensions and regulatory concerns. Government initiatives to stabilise the economy and encourage growth are deemed insufficient by investors. Such is their pessimism that it is very likely to be exaggerated and that China has become an opportunity.

Conclusion :

Unsurprisingly, 2024 will bear no resemblance to 2023 or previous years. In the first part of the year, if our 'false start' scenario and the stock market correction are confirmed, the countries and sectors that will outperform the market could be very different from last year: Switzerland, healthcare, consumer staples and energy.

Financial Research