Pendal’s Crispin Murray reviews the lessons from 2023 and outlook for 2024

What did investors learn in 2023? What are the main issues facing us in 2024? Here’s an overview from Pendal’s head of equities CRISPIN MURRAY

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• Fixed income: Pendal’s 2024 outlook for bonds, credit and cash

2023 year in review

EACH year Pendal’s head of equities Crispin Murray outlines the major factors that will affect investors in the coming 12 months.

Here Crispin reviews the big issues of 2023 and how they played out.

Further down he outlines the major factors for 2024.

1. Inflation persistence and tightening of financial conditions

Inflation fell faster than hoped in 2023 and key exogenous factors such as oil broke the right way.

Core inflation looks set to fall below 3% by the end of 2023 — and is within striking distance of the RBA’s 2% target.

This has been achieved without the need for a more severe economic slowdown.

2. Scale of US versus domestic economic slowdown

Wages – one of the lead indicators of underlying inflation – fell in 2023 without the need for materially higher unemployment.

This was because job openings shrank quickly and participation rates increased.

One hypothesis is that those holding back from labour markets stepped back in as excess savings were deployed alongside higher immigration.

Meanwhile job openings shifted down as firms worked through post-pandemic shortages.

3. Earnings leverage to downturn

No downturn meant no leverage came through. US earnings per share (excluding energy) is forecast to rise 4%, while the 2024 forecast is around 5%.

4. Did markets price in an economic downturn?

This proved to be important. Sentiment and positioning were very negative at the start of the year.

Therefore, the impact of the economy growing with inflation falling was exaggerated. US markets are up some 25 per cent year-to-date.

5. China’s economic performance as it exits zero-Covid

This disappointed after a promising first quarter. A lack of recovery in the property sector continued to impact consumer confidence.

Contrarily, this probably helped global equities. With stimulus helping steel and iron markets, oil demand was not squeezed too much and contributed to a more benign inflation outcome.

6. Could the RBA engineer a soft landing in Australia?

Australia saw stronger-than-expected growth in 2023. The mortgage cliff has – to date – been navigated through higher immigration, an ability to work more hours, higher wages, more excess savings, and supportive fiscal policy.

Inflation remains a bigger issue in Australia than the US and Europe, so the RBA cannot yet declare victory.

Key questions for 2024

Let’s now look forward. Here are the questions to consider in 2024:

1. Where is the strength in the US economy?

Will the monetary-tightening lags eventually flow through and trigger a much-anticipated recession?

Or will the easing of financial conditions, combined with rising real wages and more fiscal support, help drive growth?

Consensus GDP is 0.7% growth while the Fed is indicating 1.4%. A US recession will knock earnings estimates and be negative for markets.

2. What happens to inflation?

Markets are focused on the challenge of the last mile – ie getting from 3% to 2% inflation.

The Fed acknowledges this may be tough, but to date it hasn’t been the case. The quicker this progresses, the more rate cuts we should get in the US. In turn, this is likely to drive PEs higher.

There is also a counter thesis. In this scenario the Fed repeats the mistakes of the Burns Fed, reading too much into shorter-term lower inflation, only to see inflation re-accelerate as growth holds up.

This would likely force the Fed to shift back towards a more hawkish stance – a clear negative for markets.

3. How will the US election (and others) impact markets?

The 2024 US presidential election is already billed as the most unpredictable and important for decades.

There remain questions as to whether Biden or Trump end up running, or whether a credible independent could impact the outcome.

There is a scenario where no one achieves the required majority in the electoral college.

With so many unknowns there is one conclusion we can draw. The Biden administration will throw everything at ensuring the economic backdrop will be as favourable as possible.

This may extend to the Fed itself and become part of their shift in stance.

We also have elections in Taiwan (Jan 13), UK (May), EU (June 6), India (April), Indonesia (Feb) and Russia (March).

4. What will US rates do?

This is tied to the first three issues. The market has now priced in up to six cuts. Has this gone too far?

5. Will the Chinese economy continue to muddle through?

Will the balance of negative structural issues offset by policy continue to deliver moderate growth with no material surprises? Or will we see structural issues alleviate or deepen?

6. In Australia, can inflation be muted, allowing the RBA to cut rates?

Will the increasing impacts of higher rates begin to squeeze the economy enough to lower inflation?

Or will inflation persist, forcing the RBA into further hikes, running the risk of a faster slowdown?

7. Is the market position becoming too positive?

We are in a very different place when it comes to sentiment and positioning compared to a year ago.

We are more vulnerable to a deterioration in the current benign outlook. But we still have room to rise if the rate cycle plays out as the market now expects.

The issue we resonate with the most is the shift in the Fed’s mindset to underpin the economy rather than build inflation credibility.

Combined with a preparedness to keep using fiscal policy to support growth, this means liquidity and growth are less of a headwind, supporting the market and favouring higher-beta names.

The risk is positioning, which suggest a lot of good news is priced in – making us vulnerable to any inflation surprises.

So, as ever, the market remains unpredictable. This creates opportunity and highlights the importance of thematic positioning.

About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

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