Wealth Outlook 2024 - Slow then grow

119 Wealth Outlook 2024 | Regional outlook Europe: a slow recovery, with stronger equity returns later into 2024 their single inflation mandate instead of the two- pillar (inflation and maximization of employment) approach of the Fed, and by the region’s higher energy prices. Unless inflation were to fall materially in the spring of 2024, both the ECB and the BoE are likely to err on the side of caution before embarking on a rate cut campaign even if the labor market softens materially. We continue to think that for the next 12 to 18 months owning short- and medium-term Euro area bonds and gilts can be an attractive strategy for European and UK-based investors (even though we remain underweight European government bonds from a global perspective). This is true from the potential for both an income generation and total return perspective. Equities In 2023, Europe ex-UK equities’ lackluster performance stemmed from a substantial increase in interest rates and energy costs, tighter credit conditions and a continued deterioration in both business and consumer confidence. Meanwhile, UK equities underperformed both Europe ex-UK and global equities due to their sensitivity to the prospect of lower commodity prices and earnings deterioration in key sectors such as Energy and Healthcare. At this point, both Europe ex-UK and UK stocks are, and are likely to remain, quite cheap. As global economic activity softens heading into 2024, EU corporate revenues could come under pressure in some sectors for two to three quarters, while the combination of a tight labor market, elevated wage growth, and high input costs likely constrain operating margins. There are some bright spots for equities. Consensus forecasts have Europe ex-UK earnings per share (EPS) growth rising by 7.7% year over year (YoY) in 2024 after 2.3% YoY in 2023. Most of the uptick is expected to stem from Real Estate (21.8%), Materials (16.0%) and Information Technology (19.4%). These estimates seem a bit too bright for our taste. We do, however, see an opportunity in Real Estate, which we recently upgraded from underweight to neutral. It’s a function of just how cheap the sector has become relative to the spread between property yields and nominal rates, together with onshoring tailwinds for its industrial and logistics segments, and the gradual improvement in conditions supporting demand that we foresee in the second half of 2024. Europe ex-UK’s 2024 price-to-earnings (PE) ratio is estimated to be 12.4, down from 13.3 in 2023, while the UK’s PE ratio is 9.9, down from 10.5 in 2023. Even at those bargain-bin prices, we need to see a catalyst for meaningful improvement in fundamentals that would make present valuations attractive to us in 2024. As a result, we remain neutral both Europe ex- UK and UK equities, with a modest edge to the former as we move deeper into the year.