Frédérique Carrier, head of investment strategy in the British Isles at RBC Wealth Management, outlines her 2024 outlook for UK and European equities.

Despite a weak economic growth outlook in the UK in 2024, Frédérique Carrier at RBC Wealth Management sees investment opportunities in the unloved market of UK equities.

Carrier thinks that subdued economic growth in the UK and troublingly persistent inflation suggest that the UK may fall victim to stagflation in 2024 if the labour market deteriorates further. The Bank of England is unlikely to be willing to cut interest rates, currently at 5.25 per cent, before the second half of the year, in her view. She expects GDP growth of 0.4 per cent in 2024, on par with the level in 2023.

Carrier also thinks that a Labour party win in next year’s general election would not incite a strong negative reaction in financial markets.

Despite the unpalatable macroeconomic backdrop, Carrier sees opportunities for investors. “UK equities are attractively valued, largely unloved, and offer defensive characteristics,” she said in a note this week.

Carrier recommends a market weight position in UK equities, believing that the FTSE 100 Index’s defensive qualities should hold it in good stead given the more volatile backdrop she is expecting for the global economy and global equities in 2024.

The UK’s blue-chip equity index, the FTSE 100, has relatively large exposure to defensive sectors, such as healthcare and consumer staples, she added. Moreover, it has a bias to “old economy” industries, including energy, a sector where the risk-reward is favourable at present, given the tight supply-side dynamics, inexpensive valuations, and improving earnings' momentum. Importantly, UK equity valuations appear undemanding, with almost every sector trading at an abnormally high discount relative to history, she said.

Given the difficult domestic economic prospects, she remains cautious on companies with UK-centric revenues. Carrier recommends maintaining a bias for globally diverse, high-quality businesses. Across the market, the valuation multiples of many leading UK-listed global companies remain at a notable discount compared with their international peers listed in other markets. She views this as an unwarranted “UK market discount” on these global companies, and thinks this presents an opportunity for long-term investors in these stocks.

Europe
In Europe, Carrier believes that 2024 may be the year when fiscal and structural reform efforts enjoy the greatest impetus. With the regional economy struggling, the reforms' agenda has been given new impetus. Recommendations to improve the effectiveness of the single market are due in the spring; it will be up to the new European Parliament, which will be elected midyear, to implement them.

Carrier believes that the European Central Bank is likely to keep interest rates on hold well into 2024. Though inflation has decelerated sharply to 2.9 per cent and bank lending has waned markedly, wages are still growing at 4 per cent year-over-year, a level inconsistent with the 2 per cent inflation target. Slightly higher unemployment may be necessary for wage growth to decelerate further.

“Only once rates are cut can a sustainable economic recovery take hold. A consensus group of economists expects real GDP growth of 0.7 per cent in 2024, marginally up from 2023’s 0.5 per cent estimate. The potential for a muted recovery is due to the region’s increasing lack of competitiveness and the reining in of fiscal stimulus,” she continued.

Carrier recommends an underweight position in European equities as weakening macro and earnings' momentum remain headwinds for the region’s ability to outperform. Consensus earnings' forecasts are at risk of being downgraded, particularly among cyclical stocks and sectors, she added.

However, Carrier is watchful for any green shoots and signs that the eurozone’s relative economic growth is improving. This would be a key catalyst for increasing allocations. “The combination of inexpensive valuations and an eventual improving economic backdrop could prove an attractive combination in the months ahead for European equities, especially given their out-of-favour status,” she said.

Until then, against the backdrop heading into 2024, Carrier remains highly selective. For the patient investor, she believes that attractive opportunities exist in industrials supported by structural tailwinds such as decarbonisation, semiconductor equipment manufacturer and mission-critical software providers within technology, and luxury goods stocks that have pulled back in recent months to more attractive valuation levels. Healthcare remains Carrier's preferred defensive sector, relative to consumer staples and utilities.