The
short
answer
is:
Yes,
because
the
driving
force
behind
the
rally
in
December
has
not
changed.
Investors
still
believe
rate
cuts
are
coming
in
2024
and
are
awaiting
the
positive
effect
this
will
have
on
the
economy.
We
believe
both
European
and
US
markets
are
slightly
overvalued,
but
this
shouldn’t
get
in
the
way
of
further
market
gains
if
momentum
is
sufficiently
strong.
There
are
of
course
risks,
particularly
in
Europe,
should
the
underlying
economy
weaken
further
or
if
interest
rate
cuts
don’t
arrive
as
expected.
While
we
see
numerous
opportunities
across
sectors,
we
believe
some
of
the
more
defensively
orientated
ones,
such
as
consumer
defensives
or
healthcare,
offer
an
attractive
hedge
in
this
scenario.
Underlying
the
market
rally
in
late
2023
was
the
belief
that
central
banks
will
cut
rates
in
early
2024.
So
the
first
question
to
ask
ourselves
is
whether
this
situation
has
changed–
and
it
hasn’t.
If
anything,
recent
data
points
have
added
weight
behind
the
argument
to
cut
rates.
In
Europe,
purchasing
managers’
index
readings
are
weak,
particularly
in
manufacturing.
So
is
GDP,
which
actually
turned
negative
toward
the
end
of
2023.
The
employment
market,
although
tight
by
historic
standards,
is
still
loose
enough
that
central
bankers
shouldn’t
fear
the
effects
of
rising
rates.
Similarly,
inflation
has
fallen
close
enough
to
the
coveted
2%
level
for
them
to
be
less
concerned
about
pressures
returning
as
a
result
of
interest
rate
cuts.
In
the
US,
the
economy
is
certainly
running
warmer,
but
the
labour
market
has
loosened
sufficiently,
and
clamor
of
pulling
off
a
soft
landing
may
be
enough
to
nudge
central
bankers
towards
at
least
some
rate
cuts.
Investor
sentiment
Despite
negative
economic
readings
for
much
of
2023,
markets
maintained
their
historically
high
levels,
with
both
European
and
US
indexes
hitting
or
at
least
coming
close
to
all-time
highs
during
the
year.
The
reason
for
this
is
hope
for
a
brighter
2024
with
lower
interest
rates,
allowing
investors
to
look
look
past
weak
economic
conditions.
Now
that
we’ve
finally
entered
2024
and
are
closer
than
ever
to
those
much
vaunted
rate
cuts,
it’s
very
difficult
to
see
investors
losing
faith.
How
far
could
markets
run?
When
markets
are
trading
at
a
discount
to
our
fair
value
estimates,
its
very
easy
to
point
to
a
level
and
say
“that’s
where
markets
could
go”.
But
now,
with
both
US
and
European
markets
trading
above
their
fair
value
estimates,
it’s
impossible
to
quantify
where
they
could
go.
Famous
investor
Howard
Marks
explained
markets’
behavior
well
when
he
described
them
as
a
pendulum
that
swings
between
being
overvalued
and
undervalued,
spending
very
little
time
in
between.
We
ultimately
believe
that
markets
eventually
revert
to
their
fair
value
estimates,
but
we
acknowledge
that
knowing
a
fair
value
estimate
does
not
help
with
market
timing.
We
do
not
see
the
current
market
as
an
opportunity
to
simply
“back
up
the
truck”,
but
we
also
know
that
momentum
is
a
powerful
force
that
could
lift
markets
well
beyond
their
fair
value
estimates
for
some
time.
What
could
cause
markets
to
fall?
With
the
overwhelmingly
positive
catalyst
of
interest
rate
cuts
awaiting
us
in
2024,
pointing
out
potential
pitfalls
is
no
easy
task.
In
the
US,
the
relatively
strong
economy
and
labour
markets
could
work
against
the
central
rate
cut
scenario.
The
Fed
remains
concerned
about
a
recurrence
of
high
inflation
rates
and
an
overheating
economy.
Any
signs
of
this
in
2024
could
spook
the
Fed
into
holding
or
even
raising
interest
rates,
which
would
put
pressure
on
equity
markets.
Meanwhile
in
Europe,
the
risks
are
pointing
in
the
opposite
direction
as
its
economy
teeters
on
the
brink
of
recession,
such
that
any
interest
rate
cuts
may
come
too
late
to
stop
an
economic
crash.
Although
investors
are
for
the
most
part
looking
past
the
latest
negative
economic
readings,
this
could
change
if
the
readings
deteriorate
enough.
Where
to
invest?
Given
that
markets
are
trading
slightly
above
their
fair
values
and
risks
remain
to
investors’
optimistic
outlooks,
how
should
people
invest
in
2024?
Despite
markets
as
a
whole
being
fairly
valued,
there
is
huge
disparity
across
sectors.
In
Europe,
industrials
and
energy
are
overvalued
by
more
than
10%.
In
the
US,
technology
and
industrials
are
the
two
overvalued
sectors,
trading
at
a
5-9%
premium
based
on
our
bottom-up
estimates.
This
contrasts
heavily
with
valuations
for
sectors
such
as
consumer
defensive
and
healthcare
in
Europe,
and
real
estate
or
basic
materials
in
the
US.
Although
some
attractive
areas
we
mentioned
are
highly
cyclically
exposed,
others,
such
as
utilities
and
healthcare,
have
some
solid
defensive
qualities
that
investors
would
do
well
to
remember
should
the
path
to
a
soft-landing
not
be
as
smooth
as
hoped.
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