What will 2024 bring in the economics and investing?

Will David replace Goliath?

Financial markets had a difficult time last year. Investors' resilience has been tested by the banking crisis, the ongoing wars in Ukraine and the Middle East, as well as the battle with inflation and rising interest rates. Despite these setbacks, markets managed to end 2023 on a positive note. The key S&P 500 index managed to rise by 25%, the Dow Jones jumped by 13%, while the NASDAQ technology index recorded the highest growth of 44%.

If we look at the driving forces behind this growth, it is technology companies that have improved the most. Specifically, the so-called Magnificent Seven, that is, Apple, Microsoft, Amazon, Tesla, Meta and Nvidia, have all posted remarkable results. However, several experts agree that the trend for 2024 could be a turn of attention to mid- and small-cap stocks.

Companies with a lower market value compared to their large rivals may present more attractive opportunities. This is because they come with higher growth potential and have room for expansion and innovation, which can often be difficult for the big players. Investors could find value particularly in sectors where smaller companies are deploying change faster than their larger competitors.

"Small-cap companies have lagged large-caps since about 2015 and are thus significantly undervalued at this time," said Stephen Kolano, chief investment officer at Integrated Partners. "Such Davids instead of Goliaths can therefore deliver much more attractive valuations for investors," he added.

Key Artificial Intelligence

The year 2023 also brought a major technological innovation - artificial intelligence models. Chatbots, like ChatGPT, have fully unveiled their capabilities and have quickly become the number one topic in the IT world. In finance, in turn, investors were racing to see how to capitalize on these technological advances as quickly as possible. Clearly, this trend will continue this year, although it is unlikely to repeat its initial boom.

Machine learning models are still in their infancy and will certainly continue to grow, improve their capabilities, and provide higher-level answers. OpenAI - the company behind ChatGPT plans to introduce a new model this year called GPT-5, which is expected to be much larger and more powerful than the current GPT-4. The fifth generation will bring more parameters, more data, and the ability to generate more accurate, diverse, and creative text on any topic.

Experts agree that because of its success, AI technology will also see a war for market share this year. OpenAI enjoyed a monopoly position for a long time, as there was no chatbot that could fully compete with ChatGPT. However, it didn't take long for big companies to jump on the AI bandwagon. Google introduced its Bard, Meta its Lambda, Amazon its Titan. New competitors will try to knock ChatGPT off its throne this year, and this fight will push the entire industry to innovate even more.

Green is still in fashion

ESG principles - which stands for environmental, social and governance - should also retain their place in 2024. These sustainability principles may not be new, but it is a trend that should continue its successful trajectory this year. Large companies are increasingly expanding their portfolios to include green products. For investors, the green agenda has become a popular investment opportunity in which significant amounts of money are being invested. However, it should not be forgotten that with the rise in popularity of ESG comes the risk of greenwashing, i.e. the manipulation of company data to make them look 'greener'. Despite these risks, however, the ESG market is set to continue to grow and expand this year.

Have we tamed inflation?

After reaching its 40-year high in 2022, global inflation moderated significantly in 2023. The gradual rise in interest rates introduced by almost all central banks in the world has helped. In the US, inflation has corrected to the current 3.1%, which is not far from the Federal Reserve's (Fed) long-term target of 2%.

This could lead to a reversal of the trend and a gradual reduction in rates over the course of this year. The latest set of economic projections released last December suggests that the Fed is planning three cuts this year. The benchmark interest rate could thus fall from the current 5.5% to 4.75%. In a very optimistic scenario, some analysts are predicting even 6 to 7 times rate cuts.

However, it all depends on economic performance and the state of the economics. According to Mihir Desai, professor of finance at Harvard Business School, the reduction is not certain and "in the absence of a significant economic stimulus, the final decline to 2% will take longer and have more pitfalls. As they say, the longest mile is the last mile," he told Harvard Business Review.

In Europe, where the war in Ukraine has had the most dramatic impact on energy prices, the European Central Bank (ECB) has been somewhat more cautious in its statements. The first cut is expected to come in the summer of 2024 at the earliest. There is also talk of potential cuts in September, October and December, bringing the overall benchmark interest rate down from the current 4% to 3%. However, everything depends on the performance of the individual EU economies in the first and second quarters of 2024.

"The politicians we hear the most from are the so-called hawks, i.e. the opponents of interest rate cuts. Almost all of them are against a cut, at least in the next few months. We are therefore unlikely to see a decision until June," Jennifer Lee, chief economist at BMO Capital Markets, told Reuters.