The current interest rate environment, labeled "higher for longer," is expected to remain the central theme for all asset classes in the coming year, according to DWS. The capital market strategists of the Deutsche Bank subsidiary anticipate that both the Fed and the ECB have reached the peak of interest rates, and both are expected to "begin lowering policy rates in the middle of next year." "We are currently expecting a mild recession in the United States and low economic growth in Europe," outlines Björn Jesch, Chief Investment Officer (CIO) of DWS, describing the overall economic picture for 2024 during a press briefing.

He expects, like experts in other firms, a "renaissance for fixed income." In his view, three interest rate cuts should be possible, resulting in a broad decline in yields and a gradual "normalization" of the curve. While 10-year US Treasuries and emerging market sovereign bonds are expected to offer an attractive total return of 8.1% and 10.5%, respectively, the earnings outlook for stocks is, for the first time from DWS's perspective, weaker with an expected global total return of 6%.

Oliver Eichmann, Head of Rates, Fixed Income EMEA, explains the positive view on bond markets due to three factors that "typically create a very favorable environment": the start of an interest rate cutting cycle, weak economic growth, and declining inflation. DWS focuses on short to medium maturities, with 2-year and 10-year US bonds expected to yield 3.95% and 4.2%, respectively, more than the corresponding German bonds at 2.5% and 2.7%. Beyond government bonds, investors should consider the high-yield market in corporates. Overall, the corporate sector has proven resilient in the face of interest rate changes and economic weakness. The rating quality is good, and the default risk is moderate. Growing fund inflows support the spreads.

Compared to an overall very attractive fixed-income market, stocks are, for the first time in years, not the first or only choice for investors. With an expected total return of 6%, DWS is more pessimistic for global stocks than current consensus estimates, emphasizes Markus Poppe, Co-Head European Equities. He believes that the market's view of earnings growth for companies is overly optimistic overall. Especially in Europe and Germany, DWS expects earnings per share to increase by only 4%, while the consensus estimates 6%, and for the Dax, it even estimates 8%.

While Poppe acknowledges that investors' sentiment towards the Dax is worse than the actual situation, he believes that significantly positive news on operational performance is needed for real price impulses, and these may not be forthcoming everywhere. Notably, there is expected to be significant earnings pressure on heavyweight automotive stocks and suppliers like Continental. On the other hand, a favorable base effect may be noticeable in other industries, particularly in the chemical sector, which experienced significant earnings declines this year. However, in a challenging economic environment, many companies may find it difficult overall to support their earnings development with price increases. The catch-up effect from the pandemic has dissipated, and inflation dampens the willingness to pay. The DWS sees the small and mid-cap segment in Germany and Europe as more interesting; the valuations are also favorable here. Additionally, investing in this segment provides investors with the opportunity to "participate in innovation at a low cost," emphasizes Jesch.

The experts see very good investment opportunities in Japanese stocks. Several advantages come together here: positive currency effects due to the weakness of the yen, positive momentum in corporate earnings, and the chance to indirectly benefit from the recovery in China. For the Chinese economy, which showed disappointing performance in 2023, DWS now expects growth of 4.7%. Japanese companies typically have a revenue share of around 20% in China due to geographical proximity and are therefore considered "a proxy" for the Chinese stock market.

Generally, the development of stocks in the coming year will be driven exclusively by earnings, according to Poppe. He believes that multiples will not rise. This is especially true for US stocks, as the price-to-earnings ratio in the S&P 500 is already significantly higher than in Stoxx, Euro Stoxx, and Dax. The driving force here is, of course, primarily Big Tech. However, the "Magnificent 7" are expected to maintain their comparatively high earnings dynamics in 2024 as well, offering jumps in earnings per share of 24%.

The rally is, in a way, self-sustaining from the experts' perspective because investors tend to follow the motto "stick with the winners." The major US technology companies are characterized by extremely robust business models and high adaptability, according to DWS's assessment. This remains true in 2024, a year in which growing geopolitical tensions and the US election come into focus for investors – even though political factors should not be overestimated. Specifically regarding the US election, DWS does not expect a "major impact" on the markets.