8 “breach” of variable rent in 2024

Knut Hellandsvik, Head of Variable Leasing at DNB AM and Fund Manager at DNB Global

Before you make any predictions for the year to come, please take a quick bite to remember what you have. The last three years are normal. Hemos sufrido a global pandemic, a mini banking crisis and an AI-powered tech bonanza. Additionally, wars and the geopolitical landscape have become more worrisome in recent decades. From the perspective of the pandemic, it is due to the fiscal and monetary responsibility of authorities around the world, which has affected the financial markets the most. In retrospect, we can state that the current incentives are too strong, the global economy is recovering, and therefore a massive increase in inflation. And as a remedy, central banks will be added to the program of more aggressive bidders in decades, which will soon take effect. Lately my hemos has been witnessing quite a bit of inflation, accompanied by a huge drop in interest types in the big square, which ha hecho MSCI World posted a gain of more than 9% in November.

Against this background, variable rent markets work relatively well. Since the beginning of 2020 (before the covid crisis), MSCI World has passed 26% lederado in the variable income market estadounidez. The S&P 500 lost 36% and the Nasdaq 45% over the same period.

Under the surface, without embargo, it has asistimos and mercado very concentrated, where it is an alarming signal. EU We haven’t seen a market since the 1970s, and Magnificent company names (Apple, Microsoft, Meta, Alphabet, Tesla, Nvidia and Amazon) represent 28% of the S&P 500. The capitalization is a combination of these values ​​​​of 1,000 million euros. The combined capitalization of these stocks has been more than 100% this year, although the S&P 500 had only a 6% weighting. The Russell 2000, which includes 2,000 other small companies in the Russell 3000, is also up 6%. As a result, more than 40% of stocks in the S&P 1500 index have been lower this year.

Therefore, we believe that the probability of a global variable income market is determined by prices such as small caps, emerging markets and China, banks and value. We are not aware of this damage.

“Coming into conflict” for the variable income market in 2024:

1. Economic slowdown: In this “post-conflict” world, economic growth will continue to increase in 2023, thanks to low costs, rising real wages, to the real consumer, and a large accumulation of disease during the pandemic. We are hoping for weaker economic growth this year as indicated by global PMI numbers, as well as a very restrictive monetary and fiscal regime.

2. Disappearance of excess horror: The efficiency surplus that hotels gained during the crisis has rapidly declined. JP Morgan calculated that the efficiency surplus was mainly concentrated in the relatively housed Estunidens (20% better), although the media class (20% to 60% better) recovered its liquid assets before the crisis and 40% inferior It will happen in this situation.

3. Loss of liquidity and weakening credit markets: The money supply is so much in the US. as Europe shrinks. Banks are subject to the necessary concession criteria for both consumers and businesses and are also subject to funding costs. Credit card declines are increasing and the commercial real estate market is weakening, with significant selloffs through 2024. We are already experiencing credit card declines.

4. Do more violas last longer? Fed President Powell systematically maintains “the highest level for the longest time.” However, if the rate of inflation is significant, as the market is likely to expect 130 points of Fed core income in the near future, it can be expected that if the market still exists. A large-scale recovery will only occur if i) the economy struggles where the variable income market is not heavily observed, or ii) if there is higher inflation, which we think is likely.

5. Pressure under pressure: The profit margin is weakened by the decline in debt, the decline in price growth, the reduction in global demand, the durability of credit standards and the rigidity of labor costs. So consensus hopes for +9% EPS growth in 2024 from MSCI World.

6. Curva de rendidos invertida: Historically, it has never avoided a recession during a long period of inverted yield curves. We hope that history will not let up.

7. Awards: Commodities will hope for a perfect landing with core inflation and no impact on demand or the ability to hedge prices. The US variable income market, which represents more than 70% of the MSCI World, has a forecast PER of 19 years, compared to the median of 16 years. Las valoraciones en Japon y Europa parecen más sobrias, basically en línea con las medianas históricas. We don’t have a lot of order margin by any means, so we all believe that the EPS estimates on a global scale are a bit optimistic.

8. Riesgo geopolitico: With ongoing wars, even with the inherent riesgo of mountain climbing, we say that geopolitical riesgo is at its highest point in decades. Even so, 2024 is a big year for elections, with over 40 countries holding national elections (including the US), which could cause inflation to rise significantly.

What are your arguments in favor of variable income?

A 2% inflation mandate is required to allow central banks to significantly recover types of interest. The slowdown in economic growth is subdued, the labor market is stabilizing and corporate profits are rising. In this scenario, we can see multiple expansion depending on the small cost of capital. Of course, less geopolitical tension also affects general sentiment.

Otherwise, it could fall due to geopolitical awareness, as the escalation of the war in the Middle East caused a drop in energy prices and inflation, where this could lead to a decline in benefits and, ultimately, a recession. We also observe that the situation in China is very tense and a military conflict could be devastating for the world economy. There is also a scenario where the compression of margins previously signaled that it was serious that firms had to drastically reduce the number of employees. This is the algo you should find at the end of the economic cycle. Repunte del desempleo could drastically reduce economic activity, as consumer gas accounts for 2/3 of GDP, and could lead to a full-blown recession. During a recession, the variable rent market hovers between 20% and 30%.

by all means, Going forward to 2024, we are cautious and believe the market is based on a very realistic scenario. We have a “dumbbell” strategy that combines quality enhancement with value enhancement such as energy, finance and technology. In the quality improvement category, we are overweight in common sense, personal home care and luxury goodswe represent our businesses benefiting from strong structural growth drivers that we believe are not fully reflected in the current price. We prefer Europe and Japan over the US in all regions. debt and valuation.

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