Market outlook for 2024

Allan Eriksén, Strategist and Portfolio Manager, UB Asset Management

The post-pandemic inflation problem seems to be clearing up without a more permanent impact on economic growth from monetary tightening. Monetary policy is now expected to ease sharply as of the spring, and economic growth is expected to pick up again towards the end of the year.

Allan Eriksén, Strategist and Portfolio Manager, UB Asset Management

We can look back at 2023 as a year in which Western central banks were determined to show their resolve in suppressing the soaring inflation that followed the pandemic. Record policy rate hikes pushed short-term market rates to levels not seen for more than two decades (US over 5%/ EUR over 4%).


However, inflation already peaked in autumn 2022, after which inflation indicators have been falling at an accelerating pace. The market has been much more sensitive than the central banks to changes in the inflation outlook, which led market rates to fall sharply in late 2023.


Euro area, change in consumer price inflation % 12 months, ECB deposit rate


If market interest rates refuse to fall, a sharp fall in inflation would lead to a rise in real interest rates. Moreover, when economic growth prospects are weak in the short term, it has been easy for central banks to make an about-face in line with falling market rates. As usual, the central banks are leaving the door open for interest rate decisions insisting that they will continue to depend on future economic data.


It may also be the case that the market is once again getting a little too excited about the anticipated monetary easing and is expecting far more interest rate cuts in 2024 (6 cuts / -1.5 percentage points) than the central banks will make. For example, for the euro area, the market is pricing in a 3-month Euribor rate of 2.50% in December 2024. In any case, for the markets, the interest rate cuts are an expected and positive factor.


3-month Euribor futures


As a result of sharply tightening monetary policy, the consensus has long believed in a weakening of economic growth in the Western world, especially in the United States. The assumption has been that growth has to weaken significantly in order to keep inflation in check. However, inflation has fallen sharply despite the fact that economic growth, especially in the US, has surprised positively time and time again. Strong labour markets and private consumption, but also stimulative economic policies, have been offered as explanations for the resilient US economic growth.


Unlike in Finland, for example, loans in the US are mostly tied to long fixed interest rates, which means that sharply rising market interest rates have had little impact on interest costs for consumers and businesses. Weaker but positive growth is expected in the US in early 2024.


Economic growth in Europe has been uneven. In Germany and, for example, in Finland and Sweden (open export-driven economies), growth was slightly negative in late 2023. At the same time, growth in the euro area as a whole remained clearly positive on average.


Growth in both Europe and the US is expected to accelerate towards the end of 2024, and growth in 2025 is expected to be close to normal (1–2%) on both sides of the Atlantic.


The fall in market interest rates at the end of 2023 has also supported other asset classes. Equities rallied, and even the Finnish housing market, which had been hit particularly hard by high Euribor rates, is showing signs of stabilisation.


In terms of future equity market developments, corporate earnings forecasts and their development will once again play a key role. The market has already discounted the decline in interest rates, leading to a decline in equity market valuation multiples, especially in the US.


What is needed now is more evidence of the normalisation of inflation and central banks’ future interest rate cuts and, before long, signs of a renewed acceleration of economic growth. The most important thing for equity markets would be to gain confirmation that earnings forecasts will remain the same or even improve. 


Finland from an investor’s perspective

From an investor’s perspective, Finland seems to be in a slightly better position than the rest of Europe this time. Our economic and earnings growth and, as a result, price development, were among the weakest in Europe in 2023. The gradual return of economic growth, falling interest rates and normalising inflation will improve the financial position of companies and consumers, despite the tightening of economic policy. So there is good reason to be particularly optimistic about the Helsinki stock exchange.


Economic risks

The most likely risk is the persistence or possible new rise of inflation. This would postpone the hopes of a rapid fall in interest rates. Much of the favourable market performance in recent months has been linked to expectations of interest rate cuts, so a disappointment here could trigger a negative market reaction.


Another important risk is a delay in the economic recovery if the effects of the exceptionally strong monetary tightening last longer than expected. In this situation, however, market developments would be supported by a more rapid decline in interest rates.


Geopolitical risks remain elevated

Although the continuation of Russia's military action in Ukraine is unlikely to cause major surprises for the market, the situation in the Middle East is obviously volatile and should it escalate, could lead to a sharp rise in oil prices, among other things.


As we await the forthcoming US presidential elections, it is worth remembering that the final candidates have yet to be nominated and that the price of petrol (oil) should be as cheap as possible for the incumbent. A needless escalation of the situation in the Middle East could therefore deprive the Democrats of the presidency.


The Chinese economy is also a source of concern. Decades of investment- and debt-driven growth appear to have reached a tipping point beyond which it is impossible to continue without a significant increase in economic and political risks. Xi Jinping’s administration wants to stabilise the economy but does not seem ready for a strong stimulus. As a result, China’s economy is unlikely to provide the usual boost to global growth in the coming years.


Outlook for 2024

To sum up, the post-pandemic inflation problem seems to be clearing up without a more permanent impact on economic growth from monetary tightening. Monetary policy is now expected to ease sharply as of the spring, and economic growth is expected to pick up again towards the end of the year.

Based on these assumptions, investment markets can again look forward to a good year in 2024.


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The information presented is based on UB’s own estimates and sources considered reliable by UB. The information on which the conclusions are based may change quickly and UB Group may revise its market view without prior notice. No information obtained through this presentation should be construed as a solicitation to invest. When making investment decisions, readers should base their decisions on their own assessment of the investment and the risks involved, and to consider their personal goals and financial situation.


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