2024: Pivoting to a New Normal?

As we anticipated, both Europe and the United States avoided a recession in 2023 – with slight growth recorded in the eurozone and fairly robust growth seen in the US. Central banks were able to bring inflation down to 2.4% from 10.6% last year thanks to drastic monetary tightening policies. This included an increase of 450 basis points (bps) across 10 sessions from the European Central Bank (ECB), and the highest interest rate increase in 40 years from the US. While challenging for the global economy, these hikes did not lead to a sovereign debt crisis.

With inflation under control – and expected to stabilize at around 2% in 2024 – the main central banks are to ease their monetary policies and initiate a cycle of interest rate cuts. This will provide welcome breathing room across economies and particularly the real estate market, which is expected to rebound in the second half of the year.

As we transition to a “new normal”, in this soft-landing scenario, which asset classes are expected to perform best? According to our economists, 2024 will be the year of re-BONDS, with bonds expected to outperform stocks, which should nevertheless hold steady. It will also be the year of credit, value, gold, metals, and (almost) all currencies against the dollar. The end of the interest rate hike cycle will also result in a steepening of the yield curve.

For an in-depth look at our macroeconomic outlook and expected market trends, you can read our comprehensive report and access replays of Natixis CIB's latest Global Outlook 2024 sessions, with an interview with Vincent Levita, CEO, Infravia, in the French session, where we discuss the French government's critical metals fund.

As our macroeconomists anticipated, Europe managed to avoid a recession in 2023 with a modest GDP growth rate of 0.5%. While it is unlikely that the eurozone economy will return to its pre-pandemic growth trajectory, our economists expect growth of around 1% in 2024.

Notably, an increase in real household income resulting from a slowdown in inflation will support the European economy. Inflation, which peaked at over 10% in November 2022, is expected to stabilize above 2% in 2024, before reaching the 2% target by mid-2025. Meanwhile, strong investment momentum is expected to continue, with solid company balance sheets limiting the impact of rising interest rates on business investment.

Finally, the labor market – which has remained particularly strong since the pandemic – is expected to deteriorate slightly, though this will not affect the purchasing power of households.

With inflation under control, the ECB is expected to initiate a cycle of interest rate cuts of 25 bps from the second half of 2024, reaching a total of 125 basis points by the end of the year. Natixis CIB's research forecasts are slightly more conservative than the market consensus – which expects a rate cut as early as April – due to uncertainty over wages and inflation slowdown.

Although the United States avoided a recession in 2023, our economists predict a fairly marked slowdown in 2024. GDP growth, which reached 2.4% in 2023, is expected to half in 2024 to around 1.2%. This is largely because household consumption and public spending – both of which have been supporting the US economy – are expected to slow down next year.

In 2023, the US public deficit doubled to reach an exceptional 7% of GDP. This has proven effective given US GDP is back in line with its pre-pandemic and pre-energy crisis growth trajectory.

In the run-up to the November elections, US Congress is polarized on the public deficit and debt ceiling, which could limit public spending. Household consumption, supported by credit, is also expected to slow due to high interest rates, which have reached 8% for real estate loans. Meanwhile, excess savings, which amounted to US$2.2 trillion, have fallen below US$300 billion according to our estimates. Finally, the labor market is expected to deteriorate slightly, with an expected increase in the unemployment rate from 3.4% in 2023 to over 4% in 2024, alongside a stabilization of wages.

With a stronger-than-expected slowdown in activity, Natixis CIB economists estimate that the Fed will be more aggressive in its interest rate cut cycle next year (150 bps as early as May), while the market anticipates a “soft landing” for the US economy (forecasting a 120 bp cut).

China has been experiencing a structural deceleration since the pandemic. GDP growth, which reached 5% in 2023, is expected to fall to 4.5% in 2024 and continue its slow decline to 4.4% in 2025. An aging population, increasing public debt, and geopolitical uncertainties all weigh on Chinese growth.

This economic slowdown puts downward pressure on household income, limiting the pace of consumption growth. This is reflected in lower price increases, with inflation expected to remain at 1.5% in 2024. Policy easing, especially in the Chinese real estate market, should continue to support the economy.

China is also experiencing another structural trend: a reduction in direct investment as investors diversify towards Southeast Asian countries and India. Indeed, US direct investment in China has halved in 10 years, and according to some surveys, 40% of European companies are considering leaving the country.

In this context, India will continue its strong growth, with a forecast of 6.5% in 2024, supported by structural factors and very favorable geopolitical environment. Southeast Asia remains resilient, largely thanks to the easing of financial conditions and the reshuffling of supply chains out of China.

The environment of disinflation, falling real interest rates, and monetary easing is favorable to all major asset classes. In particular, the pivot from central banks will be particularly beneficial for bond markets and credit. Our economists are talking about a "re-bond" of the global bond market, whose performance exceeded 4% in November, an unprecedented figure in the last decade. In our view, stock markets should also perform positively as the decline of inflation means that central banks’ put is not dead.

A decline in the equity/bond correlation is to be expected. Indeed, as inflation risk declines, the correlation between stocks and bonds will return to more neutral levels, which argues for diversified allocations. With a preference for bonds over stocks this year, given that disinflation will weigh on record-high corporate margins, an economic slowdown could weigh on analysts' expectations.

US tech companies are well positioned against macro risk, but big tech names display extreme valuations and boost risk concentration, leaving the market vulnerable to adverse shocks. Tailor-made hedging strategies will be vital to cope with these risks in 2024. We continue to favor quality stocks across the board and remain wary of cyclicals in the coming quarters. We expect US equities to outperform European equities.

We also expect the rates curve to steepen in 2024 as the yield curve tends to steepen in periods of interest rate cuts.

The decline in long-term rates should also benefit sovereign spreads, allowing peripheral sovereign bonds to outperform. The ECB, on the other hand, will announce a reduction in its balance sheet on the PEPP beginning in the second quarter. This quantitative tightening could put pressure on and widen sovereign spreads, which are set to hit a high at the end of March.

Following a 4% drop against a basket of six currencies in November, the dollar index DXY is expected to continue to fall against major currencies in 2024, owing to a strengthening of expectations for Fed Funds rate cuts linked to disinflation and a slowdown in US growth in H1. Natixis CIB research forecasts the EUR will stand at 1.13 against the dollar and USD/JPY at 135 at the end of 2024.

With an improvement in risk appetite, linked to the decline in long-term interest rates, the decline in the dollar should logically favor emerging markets and risky assets. The euro, in particular, should benefit from the growth dynamic differential due to Europe entering a recovery phase, as well as the current account surplus of the eurozone.

However, the dollar’s decline will be gradual in the absence of a hard landing in the US and a strong improvement in the economic situation in the rest of the world – particularly the eurozone and China. Similarly, the maintenance of geopolitical uncertainties will also be a limiting factor for the decline in the dollar in 2024.

This generalized weakening of the dollar could be seen as a sign of de-dollarization in a world that is regionalizing, electrifying, and where some countries, such as the BRICS, are seeking to break free from the dollar. Producing more goods locally, such as renewable energy and consumer goods, reduces dollar-denominated imports, particularly of oil and gas.

In reality, the dollar still represents 59% of global foreign exchange reserves, and even though it has fallen, it still makes up 88% of transactions and 42% of Swift transactions. Many barriers to the emergence of an alternative currency for reserves and exchanges remain, such as the yuan's lack of a current account deficit. While we do see bilateral agreements on currency swaps between countries, this still only concerns bilateral trade.

Historically, real estate has been the sector most affected by interest rate hikes, and this year has been no exception. Boosted by sales, real estate investment is likely to pick up in 2024, marking a low point in prices. Over the past 10 years, we have observed the polarization of sectors – a trend that continues today and expands to polarization within sectors – which increasingly links real estate to real assets as opposed to financial markets.

Having already reached its low point, this trend is very favorable for logistics which is expected to grow going forward. At the end of June 2023, prices were at their lowest with a rapid correction of 18% year-on-year. The rebound began in the third quarter of 2023 with a rise of 0.4% – an upward trajectory that should continue into 2024.

The trend is also favorable for commerce, given the level of return offered. Frequently visited shopping centers should still experience a slight flexion and rebound in 2024, to stay relatively flat 2024. By the end of the year, the segment will have recorded a 13% decline from the June 2022 high point. In Europe, shopping centers will be supported by the recovery of purchasing power – a trend that we are unlikely to see in the United States.

We are already observing a reallocation of investments towards shopping centers which look to compete with online commerce – an area that has risen sharply from 8% of sales in 2017 to 17% at the peak of 2021, but can offer a very high levels of return. Yields for the best shopping centers in Europe exceed 6%, and some better-quality assets in the UK offer a 12% return.

The ongoing polarization in the office real estate market will favor central, connected, modern, and decarbonized buildings. These “good” assets should reach their low point by the second half of 2024, recording a decline of -7% in 2024, and registering a decrease of 26% since the peak in June 2022.

Centrally-located offices that are well-served, in good condition, renovated, restructured – or sometimes even new and accompanied by an environmental certification that attests to their energy and social performance – will resist the now well-established trend of remote working. Lower quality office buildings will reach their low point well after 2024.

Residential real estate, meanwhile, will likely reach its low point in 2024, with a minimum of a 5% decline forecast for 2023. In a number of cities, the decline is likely to continue throughout 2024, particularly given the transmission delay of six to nine months for interest rate movements in real estate, which corresponds to the duration of a transaction.

In a cautious market, it is clear that only forced sellers are experiencing a loss. In France, for example, the majority of loans are contracted at a fixed rate, which greatly limits forced sales. The tightening of regulations – for example, the penalties suffered by homes with a poor energy rating – penalizes lower quality assets more than the interest rate environment.