Image of the interior of the Madrid Stock Exchange. EfeVega Alonso del Val (EFE)
Expectations of interest rate cuts outweighed fears of a recession. Although there are signs of weakness in the euro zone, the decline in debt yields over the past two months has changed the course of markets and allowed gains in equity markets to run wild. The Ibex 35 recorded its best semester in 10 years in June and this was reinforced by the resistance of the results, the record breaking of the financial sector and the idea that interest rates have peaked and will fall in 2024, a catalyst for the Selectivity to finally return to pre-pandemic levels. Managers are preparing their strategies for 2024, in which monetary policy, inflation and the development of the economy will set the pace.
Repeating an exercise as good as this one – Capricorn rises 22.88%, its highest revaluation in 14 years – is complicated, but the consensus is optimistic and expects stocks to continue the upward trend. Of course, the increases are likely to be more moderate and not as concentrated in sectors such as banking, which is up 20% in Europe.
Among the most positive companies for the next 12 months, Renta 4 stands out. Experts set 11,816 points as the Ibex target. That means they give it a potential of 17%. Achieving this outcome will largely depend on the strength of the economy and the rate cut that the market has long expected. Natalia Aguirre, the company's strategy director, still warns that investors are optimistic. The expert believes that interest rates have peaked, but does not share the idea of a cut as early as March or at the rate discounted by the market, since inflation will only reach the 2 percent mark after some time. The company postpones the reduction in the price of money until the second half of 2024 and sets the deposit rate in the euro zone at 3.25% at the end of the year. That is, 75 basis points below current levels.
Bankinter's experts go in the same direction. Ramón Forcada, head of the company's analysis and markets department, postpones the first interest rate cut in the euro zone until October, a delay that will benefit banks. At Bankinter, a target value of 11,317 points was set for the Selective, which corresponds to a potential of 12%. “The valuations of stocks and bonds are justified and offer sufficiently attractive potential. But it is likely that a consolidation phase will develop in 2024,” they emphasize. The company expects that a favorable environment for fixed and variable income will continue to prevail next year. The reduction in interest rates and the expansion of business results will help continue the gains of both assets, which has not been the case for 10 years.
The key to markets maintaining the positive tone of the last two months is that interest rate cut expectations are met and the economy does not fall into a deep recession, a scenario that consensus is ruling out. Instead, managers are pointing to a slowdown. Juan José Fernández Figares, investment director at Link Gestión, points to inflation as one of the main risks. “If prices perform worse than expected, as is likely for Europe, the long-awaited rate cut will be delayed, which could lead to occasional corrections in the first few months.” Subsequently, the behavior of the economy will determine the development of these markets. “If expectations are met and the macro scenario improves over the course of the year, we believe that equity markets can finish positive again for the second year in a row,” he added.
Ángel Fresnillo, director of variable income at Mutuáculos, believes stocks can continue to perform well in a soft landing scenario (reducing inflation without harming the economy). Of course, the increases will not be as vertical as in recent months. To avoid shocks, the manager chooses high quality or more defensive companies that have been affected by interest rate increases. He chooses SOCIMI Colonial and the German medical technology company Carl Zeiss as representatives of this trend.
After a year in 2023 in which small and mid-cap companies were excluded from the strong gains (the Ibex Small is up 10.2% and the Medium is up 5.98%), Alfonso de Gregorio, investment director at Finaccess Value, believes that this will be the case in 2024 Take the baton as these companies trade at the largest discount to large companies in 20 years. The expert also selects companies with attractive dividends where coupon yields have lost their luster due to the rise in very short-term debt yields. In an environment where interest rates are expected to fall, de Gregorio believes it is logical that the most conservative investors who have invested in money funds this year are shifting their portfolios towards companies that have attractive remuneration policies for shareholders and were punished by the tightening of monetary policy. The best representatives of this trend are energy suppliers like Iberdrola.
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