UBS analysts identified 10 potential surprise events for 2024.
According to a global equity strategy report, these events are possible, although not necessarily the market or UBS analysts’ base case.
UBS analyzed the investment implications of each of these scenarios:
Generative artificial intelligence increases productivity growth to 2.5% and fuels an S&P rise of 20% this year.
UBS’ core view is an S&P 500 (SP500) price target of 5,400 by the year-end.
The Fed and UBS economists assume productivity to rise 1.5%, but if it rises 2.5%, then the Fed would be undershooting their inflation target and should be able to cut rates quicker.
Most importantly, analysts said, the equity risk premium (or ERP) would be 1.2% higher at 5.1%, compared to a warranted ERP of 4.2%, with equities having a 20% upside potential.
China’s nominal GDP slows to 3%.
What UBS analysts believe is that China’s nominal GDP growth will accelerate to 5.1% this year, with real GDP growth at 4.6%. But if its nominal GDP slows sharply — dealing with their three bubbles: credit, real estate, and excess investment — it would cause disinflation, cause house prices to fall below their collateral values, and raise loan-to-values much higher than expected.
“If house prices fall below collateral values, then there is normally a substantial risk of a large rise in NPLs (not performing loans),” analysts said. “This would require a bad bank to be set up — similar to Resolution and Trust Bank after the S&L crisis in the late 1980s in the U.S. — The risk is that the authorities might be slow to react, which would then prolong a debt crisis.”
This translates into a weakening of the RMB and big headwinds for global capital investment. It would also affect cyclical sectors, especially luxury and semiconductors.
The three-month (US3M) and 10-year bond (US10Y) yield curve steepens to 2%.
The house core view is that bond yields will fall to 3.6%, and the short rate to 3%, but GDP could slow more than the consensus expects due to excess savings being largely used, and another fiscal tightening after big fiscal easing. UBS analysts expect policy to take off 0.2% from GDP in 2024.
In addition, “a President Trump might cause a slump in capex in Q3 as corporations postpone decisions until there is more certainty on both regulation and IRA tax credits,” analysts said.
Also, the lagged impact of credit tightening and the slow roll-over of debt could reduce GDP.
Analysts said the economy has become “interest rate-insensitive.” About 5-10% of mortgages are floating and are not portable, the average maturity of investment grade is almost 12 years, and high yield is six years. Also, corporate fixed income accounts for nearly 70% of the total corporate borrowing.
In summary, “if bond yields rise and the yield curve steepens, this is normally good for banks, value, life companies, companies with unfunded pension deficits, and short duration stocks.”
Bonds stop diversifying again.
UBS analysts believe that stocks will continue to diversify if there is growth and inflation falls below 2.5%, but what if they don’t?
This could happen if the market anticipates a permanent change in the fiscal policy attitude. Fiscal easing could lead to increased worries over debt sustainability, analysts said.
“If bonds don’t diversify, then an important structural buyer of bonds is lost in the 60:40 funds. If bonds don’t diversify, then what does? Banks, life companies, value stocks, and companies with unfunded pension liabilities.”
European pharma becomes the best performing sector in Europe last year.
The sector could benefit the most from artificial intelligence, UBS analysts said. Anti-obesity drugs have huge potential, but the house core view is bearish/underweight.
Neither Biden nor Trump are elected president in 2024.
Although Trump is currently ahead, he could be prevented, on legal grounds, from becoming president. On the other hand, President Biden, due to his age and health, may step down or be forced to step down.
The impact could be a “relief rally” in bonds and the fall of inflation expectations.
A peace deal in Ukraine.
A peace deal could cause gas prices to fall.
Eastern Europe could outperform, especially its banks. About 6% of Poland’s pre-war exports were to Russia and Ukraine. Germany would also benefit from both lower energy prices and its exposure to Eastern Europe, including Russia.
“For Europe as a whole, our economists highlight that 10% off the retail price of gas, oil, and electricity would boost GDP growth by 0.2% and cause a 1 percentage point fall in headline inflation,” analysts said.
Japan volatility rises sharply relative to the U.S.
UBS analysts believe it would actually fall relative to the U.S.
Volatility in Japan could rise strongly if there is a soft landing or no landing globally, and there are only small changes in Japanese monetary policy, leading the market to rise 20-30%.
In addition, there could be Japan volatility if “the BoJ only tightens very marginally, real rates stay heavily negative, and that forces a once-in-a-generation asset allocation shift,” according to analysts.
Another possibility comes if corporate governance improves, and with it the scope for earnings upgrades.
Apple’s (AAPL) market cap falls below $2T in 2024.
UBS rates Apple (AAPL) as neutral, with a target price of $130, implying a market cap of $2.9T.
Although the stock trades as software, 80% of its revenue is from hardware. UBS forecasts a 4.3% free cash flow yield in 2027. The P/E relative of the stock for 2026 estimates on EPS is a record high of 152%.
Earnings momentum is the weakest of the Magnificent 7, aside from Tesla.
Other factors that may cause Apple’s market cap to fall include: a mature smartphone cycle, a peaking profit margin in the service sector, no products in the pipeline, falling behind on the generative AI trend, a clear China risk, and a rising TIPS yield that would hurt long-duration assets.
The U.S. cuts rates, but corporate interest charges rise.
Last year, corporate interest charges fell $200B from their peak levels as interest rates rose.
“Corporate treasurers have been putting their cash piles into short-dates maturities,” analysts said. “This ironically could mean that, into falling rates, the corporate net interest charge rises.”
