Strategist: Equities will fall 25% in 2024 (but these stocks will outperform)

And while all this sounds incredibly pessimistic, there is a lot of nuance (and for that matter, pockets of bullish opportunity) in BCA's asset allocation outlook - nuance that the firm's chief global asset allocation strategist Garry Evans was keen to emphasise. In this wire, I'll share the highlights of my conversation with Evans - which covers equities, bonds, and commodities.

The (unseen) consequences of the end of easy money

The outlook white paper, entitled "The End of Easy Money" should tell you all you need to know about what themes will dominate markets in 2024 - higher for longer interest rates.

"Our view is that we're in a world where nominal GDP growth is a pretty good guide to where interest rates are going to be. Inflation has been running at around 1.5% but our view is that it will run at about 3%. Real growth [we think] runs at around 1.5 to 2%, meaning the equilibrium level for interest rates will run at about 4.5 to 5% rather than the 2 to 2.5% as they have been," he says. 

BCA Research, like many other houses, has had a long-held call for a recession in the US and Europe. Their current call is that this recession is on course to happen "so long as monetary policy remains tight".

As for the rate cuts question:

"As soon as we see unemployment going up sharply, the Fed will cut rates. The problem this time, however, is that even if you see the jobs market starting to deteriorate, inflation is still too high," Evans notes.

"Some people call it immaculate disinflation where the Fed can cut rates not because we're in a recession, but because they can declare mission accomplished on inflation. That's what we think is pretty unlikely," he adds.

BCA's S&P 500 call

As Evans says, coming up with an exact number for where the S&P 500 will be in December 2024 is both "a fool's game" and "a marketing tool". As a result, BCA Research comes up with a range rather than an exact figure.

"We think the range is likely to be 3400 to 3500 and even in the mildest [recession] environment, we think the S&P 500 would be at 3700," he says. 

This implies that the benchmark American stock market index could fall by as much as 25% next year. So how did they reach this number and why are they so bearish?

"The fair value just comes down to the forward P/E ratio and earnings growth. What you find in a recession is that even in a mild scenario, is that forward earnings tend to fall 5 to 15%. Then, on valuations, you have to make various calculations but we would say we're basing this on a range of P/Es, between 14 and 18 times. That gives you the 3400 to 3500 call," Evans postulates before admitting that it is a "shocking" call. 

So why are they making such a negative (or at least, downside-heavy) call? Evans argues it this way:

"A 25% decline is nothing. The median decline in a recessionary bear market in the US is 37%. I think it just emphasises that when a bear market and a recession comes, things often get a lot worse and a lot more quickly than people expect," he says.

A negative call with nuance

While BCA's call may sound bearish, there is a lot of nuance within this call. For instance, Evans remains neutral-weighted on US mega-cap tech stocks. 

"The good news is that they are not very cyclical. They are very high quality and companies like Meta (NASDAQ: META) and NVIDIA (NASDAQ: NVDA) will still see decent profit growth even in a recession." 

"The bad news is that they're extremely expensive and they look a lot like the tech bubble in 2000. The other reason is that when people start getting scared and everyone says 'sell, sell, sell', what do they sell? They own a whole lot of Magnificent Seven stocks and you can only sell what you own," he says. 

But nonetheless:

"There is still a very strong story here around AI. Unlike the tech bubble in 1999/2000, it's pretty clear who the winners from AI are going to be," Evans says before adding "It's pretty obvious that Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), and NVIDIA are going to be the winners. It's a bit less of a lottery and I don't think people want to bet against these," Evans adds.

As for other investment opportunities within the equity market, Evans nominates the tried-and-true defensives.

"[US] Healthcare is a good long-term story. Utilities are boring and horrible but they are bond proxies and tend to do well when interest rates go down. And consumer staples as well - these are the three classic defensives," he says.

Cross-asset calls (including the investment that could make you a 25% return)

Above all, Evans says it's time to put cash into work. Government bonds are one option that can now net you big returns - possibly as much as 25% for just 12 months' holding.

"Where I think we are now is falling inflation and falling growth. So the fall in growth is bad for equities but the fall in inflation is good for bonds," Evans says. 

"If Australian bonds go back up to 5.1%, your government bond holding will not make a loss. You'll be flat after a year. If it were to go back down to 2%, for example, like in a recession where Australia would follow the rest of the world down, you're going to make 25%. So it's a very cheap hedge, and the risk of yields going higher than that is pretty low," Evans says.

"You're getting a hedge against a recession for nothing. The cost, even if it goes bad, is nearly zero," he adds.

We also asked a question about gold - given it recently hit nominal all-time highs. Evans' view is that the gold price will follow how central banks talk about inflation.

"What drives gold is not inflation, as some people think. It's central banks turning too dovish on inflation," he says. 

"If you're worried about that, you want to hedge against the risk that the Fed and other central banks are turning too soft [on inflation]. So you buy gold and you buy bitcoin. People are starting to buy all those inflation hedges," he says.