DWS Positive On Japanese Equities, Euro IG Bonds In 2024

Amanda Cheesley Deputy Editor 24 November 2023

DWS Positive On Japanese Equities, Euro IG Bonds In 2024

German asset manager DWS, previously part of Deutsche Bank, outlines the macroeconomic outlook and investment opportunities in 2024.

Björn Jesch (pictured), global chief investment officer at DWS, this week highlighted the comeback of fixed income investments in 2024.

The time of no alternatives for equities is over for the time being. "From a multi-asset perspective, we can handle the current challenges – geopolitical tensions, central banks at a crossroads, higher interest rates – very well,” he said in a statement.

“We favour robust, well-diversified portfolios that should cope well with different economic scenarios," Jesch said. "In view of our base scenario of a soft landing for the economy with a fall in inflation and interest rates, we are positive about a longer duration." However, he believes that it will be difficult to lower inflation from 5 per cent to the targeted 2 per cent.  

In terms of equity allocation, Jesch is neutrally positioned in view of the increased attractiveness of interest rate investments and the geopolitical risks in the Middle East. He favours Europe and Japan over the US.

At sector level, he prefers a more defensive orientation. The communication services sector, for example, appears promising to him. In terms of investment styles, Jesch favours growth stocks, with quality at reasonable valuations. Gold has its place in the portfolio as a risk limiter and also as a yield generator, according to Jesch.

First rate cuts expected in 2024 
He does not expect any further interest rate hikes for either the US or the eurozone. The firm believes that economic growth in Europe will be weak in the first half of 2024 and will be 0.7 per cent for the year as a whole, roughly the same as this year. The US economy has held up surprisingly well so far. "However, we also expect growth to slow to 0.8 per cent in 2024 after 2.3 per cent in the current year," Johannes Müller, global head of research, said.

The firm also thinks that the situation in China should improve significantly over the course of next year. However, the recovery of the ailing real estate sector will probably take a little longer.

DWS highlighted how 2024 will be characterised by a large number of elections, including in the US, India, Russia, Taiwan and South Korea. In the short term, this could lead to significant market reactions – higher risk premiums for bonds, falling share prices, increased volatility, a flight to supposedly safe investments. "However, the past has shown that such reactions do not last long and the effects are very limited to sectors or individual names," Müller said. 

Bond markets: positive total returns 
"We expect positive total returns in most market segments on the bond markets next year," Oliver Eichmann, head of rates, fixed income EMEA, added. "Our favourites are short and medium-term government bonds and corporate bonds." 

Eichmann's outlook for corporate bonds is positive: "Experience shows that low growth rates and the prospect of interest rate cuts are a good environment for investment-grade corporate bonds. Our favourites are euro investment-grade corporate bonds."

The firm believes that favourable valuations and high yields should attract more capital. Interest rate premiums are likely to fall somewhat. Particularly promising are senior bank bonds, whose spreads should fall slightly. 

The relatively high yields of high-yield bonds are also likely to be attractive to investors in 2024. Valuations are attractive in view of the rating quality and the expected moderate default rates. Risks for the asset class could arise should there be further geopolitical turbulence and a stronger recession than is currently expected. 

According to Eichmann, covered bonds have become much more attractive again as interest-bearing investments with a very high credit quality (AAA rating). Liquidity has improved significantly and yields are currently around 0.8 per cent higher on average than comparable German government bonds. 

Equities: Europe and Japan promising 
"After three years in which corporate profits stagnated globally, we expect growth of 8 per cent in the industrialised nations and 11 per cent in the emerging markets in 2024," Marcus Poppe, co-head European Equities, said. "However, this puts us around 3 per cent below the consensus expectations, which we believe are too optimistic as they do not take sufficient account of the impact of high interest rates." 

In 2024, total returns of 6 per cent on the global equity markets are realistic, the firm said, adding that the US market is highly valued. The firm believes that the stock markets in Europe and Japan will be more promising than the broad US market in 2024.

In Europe, second-line stocks, which have suffered from the risk aversion on the markets and have low valuations, are particularly interesting. "If – as we expect – there is a soft landing for the economy, these stocks are extremely promising," said Poppe. "Our top pick for Asia is Japan, both from a valuation perspective and in terms of earnings growth, which is supported by the weak yen." Japanese equities are also a good way of benefiting from China's growth opportunities. Ben Preston at Orbis Investments also thinks that the Japanese market is attractive, citing factors such as the rebound in tourism in Japan. See more here.

Real estate: a good time to enter the market
"2024 should be a good time to invest in real estate equity," Jessica Hardman, head of European Real Estate Portfolio Management, said. The market risks are largely priced in after the price falls of the last 18 months. In the European market, the residential and logistics real estate sectors are particularly promising.

Hardman also sees opportunities in the area of real estate debt, i.e. the financing of real estate investments. Regarding the growing market for infrastructure equity investments: "The segment is much more investable than in the past." Investors have recently been reluctant to invest in equities. "We are seeing a turnaround in the last and current quarter – transactions and investments have picked up again," she added. Infrastructure debt is also promising. The asset class is benefiting from the need for financing in connection with megatrends such as the transition to sustainable, climate-neutral energy supply and digitalisation, the firm said. 

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