Real Wealth Concepts

Morgan Stanley 2024 Global Strategy Outlook

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Morgan Stanley has released its 2024 Global Strategy Outlook.

Here are the key takeaways from the report (directly quoted):

While many assets are already fairly priced for a soft landing, 2024 remains a good year for ‘income investing’. Opportunities abound in high-quality fixed income – DM government bonds, IG credit, agency MBS, and senior tranches of securitized credit. Unlike the last two years when we had strong RoW > US, we expect that US assets will find 2024 easier, and EM markets less so.

Global Equities – Japan Leads, Look for US Earnings Recovery:

  • Japan reflation and ROE improvement are secular positives while Europe and EM growth likely disappoint.
  • We expect US earnings growth to trough in early 2024 and rebound thereafter.
  • We recommend a barbell of defensive growth and late-cycle cyclicals.
  • We see the S&P 500 at 4,500 at end-2024.

G10 Rates – Overweight Duration:

  • Easing drives yields lower in the US, Europe, the UK, and the dollar bloc.
  • Curves steepen globally, except in Japan.
  • With the BoJ eventually delivering a rate hike, we expect JGB long-end yields to remain near current levels even as other global benchmark yields decline.
  • We forecast UST 10Y at 3.95%, DBR 10Y at 1.80%, and JGB 10Y at 0.90% by the end of 2024.

G10 FX – USD Peaks in Spring but Further Weakness Contained:

  • USD strength continues through 1Q, as growth and rate divergence continue and USD’s defensive characteristics remain alluring.
  • JPY outperforms on the back of the BoJ exiting YCC and NIRP.
  • We see the DXY at 107 by end-2024.

EM Fixed Income – Still Cautious:

  • USD strength and continued fund outflows lead EM credit spreads to go sideways.
  • We would hold off on adding more beta risk until spreads are wider.
  • We favor IG over HY in sovereign credit and see limited prospects for a recovery in EM local bonds without a recovery in USTs.
  • High US rates will likely cannibalize broader EM fixed income flows, and so we need US rates to turn lower to prompt inflows to EM.

Corporate Credit – Up-in-Quality Time:

  • IG credit is part of a ‘constellation’ of reasonably priced high-quality fixed income, supported by a Fed/ECB pause and soft landing.
  • For leveraged credit, still-high rates and slower growth erode credit quality, keeping defaults and downgrades above average.
  • We expect more tiering and wider spreads.
  • We prefer IG over HY across the US, Europe, and Asia, and BBs over Bs across bonds and loans.