What to pay attention to in 2024? Bank of America: Global central banks may cut interest rates in the middle of the year, and Japan is expected to break free from the "lost three decades".

After the eleventh interest rate hike, the long-predicted economic recession by many analysts has still not arrived. On the contrary, apart from the subdued consumer confidence caused by excessive savings depletion and inflationary factors, the US economy continues to demonstrate remarkable resilience.

Currently, with only one month left until the end of 2023, geopolitical tensions in places such as Israel and Palestine, Russia and Ukraine, are still ongoing, and the US will face a major election next year... What should investors do in 2024?

In the latest research report released by the Global Research Department of Bank of America, economists and strategists predict that the downward trend of inflation in Europe and the US will continue. The report states that the Federal Reserve and the European Central Bank will begin to cut interest rates in the middle of the year. Bank of America believes that the US economy will ultimately achieve a soft landing and avoid a recession. They also predict that corporate earnings per share will accelerate, and by the end of next year, the S&P 500 is expected to reach 5000 points. The report also suggests that the interest rate cuts and the peak of the US dollar will bring benefits to emerging markets, and the Japanese economy is expected to emerge from the deflationary quagmire of the "lost three decades," driving an upward trend in Japanese stocks...

The following are the key trading themes for 2024 identified by the team:

Global shift towards interest rate cuts, the US economy expected to achieve a soft landing

Candace Browning, Head of Global Research at Bank of America, wrote:

"2023 has almost shattered everyone's expectations: the economic recession has not materialized, interest rate cuts have not been realized, and the bond market has not rebounded except for a brief vicious bounce. The rise in stock prices has caused pain for most investors who have remained cautious and underinvested. We expect 2024 to be a year of successful soft landing, although the downside risks may outweigh the upside risks."

Bank of America believes that as global inflation rates gradually decline, major central banks will generally start cutting interest rates in the second half of 2024, thereby avoiding a global economic recession. Michael Gapen, Head of US Economics, predicts that the Federal Reserve will cut interest rates for the first time in June and will cut rates by 25 basis points each quarter in 2024.

As for the impact of interest rate hikes on the economy, Bank of America believes that despite facing multiple headwinds, the US economy can still achieve a soft landing with the support of strong consumer demand.

Several factors contributing to strong consumer demand include: "a robust labor market leading to stable growth in disposable income, substantial excess savings (which we estimate to have been depleted by about 55%), growth in household net worth (about 15% higher than pre-pandemic levels), large-scale mortgage refinancing, and elastic real estate prices due to the locking effect."

We expect the pace of consumption growth to slow down but not collapse. Investment growth will slow down compared to the first half of 2023 as the impact of supportive legislation begins to weaken. The major deficit will shrink slightly compared to 2023, and fiscal impetus will significantly decrease.

The recent increase in debt default rates, the resumption of student loan repayments, and the rise in real interest rates all indicate a weakening of consumer demand, although we still believe that future consumer demand will remain resilient. As the economy begins to feel the impact of tightening financial conditions and the effects of the "Chip and Science Act" and the "Inflation Reduction Act" gradually dissipate, investment growth will slow down, and we expect the data to start showing a soft landing.

S&P 500 Index is expected to reach a new high of 5000 points by the end of 2024

Savita Subramanian, the head of US stocks and quantitative strategies, remains optimistic about the stock market. Analysts point out that the bullishness of the stock market is not due to the expected interest rate cut next year, but because companies have already adapted to a high interest rate environment.

Although the US GDP growth rate will slow down next year, Bank of America predicts that the earnings per share of S&P 500 constituents will be $235 in 2024, a year-on-year increase of 6%.

Based on financial history, earnings per share usually decline for six consecutive quarters before a recession and then turn to growth. The current scenario of earnings growth and GDP slowdown is the best environment for the stock market since 1950, and the normalization of commodity and service prices also indicates a good profit outlook for companies.

Analysts also point out that energy security brought by domestic oil and gas production is a major advantage of the US economy. The "American exceptionalism" still holds true. Compared with other countries, the US dollar's reserve currency status gives the US more room to address the deficit issue. The transfer of wealth from the baby boomer generation with $80 trillion in net assets to the millennial generation has already begun.

In addition, based on historical data, upcoming elections have always been a positive factor for the stock market. More importantly, both the Democratic and Republican parties support maintaining defense spending and supporting the struggling US manufacturing industry, which is beneficial to the performance of the stock market. However, the volatility of the stock market may increase in the second half of the year.

Brent Crude stabilizes at $90, and commodities will be replenished

OPEC+ has been cutting supply since 2022 and may continue to do so in 2024. Francisco Blanch, the head of commodities and derivatives research at Bank of America, believes that as emerging markets benefit from the end of the Federal Reserve's monetary tightening cycle, oil demand in 2024 will increase by 1.1 million barrels per day. However, the average prices of Brent and WTI should be $90 per barrel and $86 per barrel, respectively.

Economic recession, unexpected growth of US shale oil, and lack of cohesion within OPEC+ are all downside risks for oil prices. Lower interest rates should boost gold and lead to replenishment of industrial metals.

The analyst wrote:

Historically, interest rate cuts have on average pushed up commodity prices by 19%, and the energy and industrial metals sectors have often outperformed the more micro and weather-affected grain markets.

One key point to note is that historically, the start and duration of oil production cuts have often coincided with macroeconomic weakness and risk aversion. Therefore, although the implementation of loose policies may be positive for oil prices, it largely depends on the specific circumstances. The most consistent reference point occurs after the last interest rate cut, when the macroeconomy stabilizes.

However, we note that commodity prices tend to rise significantly when stocks (and positions) are just starting to be at low levels. Considering the current status of commodity inventories, we believe that the shift in monetary policy (which emerging markets have already done) may be a signal that we should increase investment in energy and commodities. Japan is expected to emerge from its "lost three decades", according to Bank of America. The bank believes that Japan's consumer spending will improve next year, while inflation will continue to rise, which is a positive factor for Japan:

"At the same time, manufacturing activity may remain tepid in the short term. However, we expect a slight increase in income in the first half of the 2024 fiscal year, reflecting significant progress in inventory adjustments in the technology industry.

Although actual consumer spending has been weak, we expect the situation to improve in the coming quarters, thanks to the expected slowdown in import inflation. This should help stabilize consumer confidence and give real income time to catch up. Further increases in basic wages in the 2024 fiscal year will also support the recovery of confidence and spending among wage-earning households."

In addition, Bank of America also expects progress in corporate reform, as evidenced by the largest number of companies raising guidance in the past decade:

"On January 15, 2024, the Tokyo Stock Exchange will announce a list of companies that meet its requirements for price-earnings ratio reform, and plans to update the list monthly. We expect various companies to propose measures to improve their price-earnings ratio and corporate governance, while announcing their annual performance and mid-term business plans.

We believe that 2024 will be a year of significant macro and micro structural changes in Japan, which will provide a real catalyst for the Japanese stock market."

Interest rate cuts and the peak of the US dollar are positive factors for emerging markets. Analysts say that in the 12 months following the last rate hike cycle by the Federal Reserve, emerging markets often see positive returns, and the positioning of emerging market assets is relatively low. China's economic growth is expected to stabilize. With the slowdown in US GDP growth and the Federal Reserve starting to cut interest rates, the foreign exchange team is more bearish on the US dollar than consensus expectations.

Regarding China, Bank of America stated that "if China's official gradual policy support continues to appear in a coordinated, concentrated, and sustained manner, it should be able to contain downside risks and help stabilize GDP growth rates at around 5% in the following quarters."

On the other hand, the government's increase in public investment (such as infrastructure and affordable housing) and capital expenditure to support high-end manufacturing will partially offset the drag from the sluggishness of real estate developers' investment.

In addition, analysts believe that the real estate market and consumer demand may rebound next year:

"The housing market will stabilize and gradually recover from the second quarter of 2024. Improvements in the labor market and income growth should help restore household confidence and increase willingness and ability to consume. At the same time, regular releases of suppressed demand (for example, during major holidays or the summer period) may continue to drive the recovery of service consumption."

As for India, Bank of America believes that the country's real GDP growth may further slow down:

"With the normalization of base effects, GDP growth will be lower than the trend value on a year-on-year basis, but we expect the growth recovery to remain strong. However, the expected slowdown in global economic growth in 2024 and 2023 is also expected to impact India's economic growth trajectory." In terms of driving factors, although the growth rate of the service industry has slowed slightly, it is expected that the growth of agriculture and manufacturing will drive overall GDP growth in the fiscal year 2025. Given the good foundation and the expectation of normal monsoon, agricultural growth is expected to recover in the fiscal year 2025. The favorable investment environment created by loose monetary policy and government promotion of capital expenditure should attract private investment and drive the growth of GVA in the manufacturing industry. In the election year, due to reduced potential demand and a slowdown in construction activity, it is expected that the growth of the service industry will also slow down.

The bull market in US stocks may come in the second half of the year, but there may be a pullback at the beginning of the year

Michael Hartnett, Chief Investment Strategist at Bank of America, believes that the bull market in US stocks in the second half of 2024 will be mainly driven by the 3Bs: bonds, gold and breadth (the diversity of market participants).

Although Bank of America's Global Research Department believes that the US economy can achieve a soft landing, this well-known bearish investor believes that the risk of a hard landing for the US economy is higher than expected. He predicts that before the comprehensive bull market driven by the 3Bs appears, there may be a pullback driven by the 3Ps: put positions, profit recession, and loose policies.

At the same time, analysts believe that the impact of the high US government deficit should gradually dissipate next year. Bank of America's US economists team predicts that US consumption will slow down but not collapse. Currently, US capital expenditure is facing cyclical headwinds, and data shows that the number of CEOs supporting increased capital expenditure in the next six months will decrease.

In terms of other assets, Bank of America points out that interest rates, earnings, and issuance may pose challenges to credit investments in 2024. Bank of America's credit strategists are more inclined towards high-quality credit.

They believe that investment-grade credit offers the highest relative value, not only providing more arbitrage opportunities than high-yield bonds, but also having similar levels of credit losses.

In addition, in 2024, as the United States, which accounts for more than 60% of global GDP, will hold a presidential election, Bank of America predicts that policy uncertainty will increase in the face of increasing political polarization. Fiscal consolidation becomes difficult and may have a negative impact on US bonds.