Claus Vorm, Portfolio Manager of Nordea’s Stable Equity Strategies, talks about how his team is taking on the 2024 market with confidence

Investors today may be looking back fondly on the decade following the global financial crisis, as unprecedented monetary stimulus and ultra-low interest rates powered one of the most fruitful periods in history for markets – particularly for growth-related equities.

However, this largely serene environment has since given way to elevated economic uncertainty and increasing market volatility. As we approach 2024, the primary challenge facing investors continues to be very sticky inflationary pressures, which are forcing many central banks to still aggressively hike interest rates way beyond initial market expectations.

With market nervousness persisting, investors are understandably uncertain of where to turn. Despite the ongoing challenges, if we look at markets through a fundamental lens, equities remain the asset class most likely to deliver a robust return able to offset inflation.

But risks in the market have clearly risen, so it is vital for equity investors to be increasingly selective. We believe the most successful companies in 2024 will be those with steady earnings and robust balance sheets, which can be stabilising forces against economic weakness and rising rates.

Stability has not been the most in-demand equity quality over most of the past decade, as investors gravitated towards stocks exhibiting outsized growth potential. But in this new investment paradigm, we have seen how markets have already begun rewarding stable companies.

A combination of qualities

Stable equities are typically less economically sensitive than the broader market, as these businesses produce products or offer services largely essential to everyday consumption. This universe is quite vast, from basic foods and personal care items, through to the provision of utilities and many IT goods and services.

While such companies largely enjoy consistent demand throughout an economic cycle, this characteristic alone is not enough. We believe it is vital to identify companies able to complement steady demand with pricing power. This is particularly important in an inflationary environment, such as the one we are currently witnessing, as companies with pricing power are naturally in a far better position to continue delivering earnings growth by passing on cost increases.

Then there is one final piece of the puzzle: valuation. Investors must keep a close eye on valuation – as a stable company is not automatically a stable share. Stable companies need to be trading on fundamentally attractive valuations, as the market environment in Q3 2023 has clearly displayed how much added volatility is associated with stocks at elevated prices.

Will 2024 see a rotation towards low risk, high quality and attractively valued stocks?

While we don’t have a crystal ball and we never try to outsmart the market, it should be the companies’ fundamentals that should guide us and provide insight on how to navigate markets at this very dynamic time. We believe equities can be an unparallel tool to navigate an environment where inflation is expected to be somehow higher compared to the past decade.

Having said that, we have an even higher conviction on low risk, high quality and attractively priced stocks that can deliver stable growth. These stocks trade, in some cases, at historically attractive relative valuations, have above market earnings growth and have not been significantly impacted in terms of earnings revisions. As a result, we believe they can add significant value to investors’ portfolios when, given their overall ability to offer lower capture ratios during market corrections, but still attractive upside when the market performs well.

A new dawn for equities

For the first time in almost 15 years, equity markets can no longer rely on the tailwinds of historically low interest rates and unprecedented monetary support.

If we are to encounter a period of elevated economic uncertainty and asset price turbulence, we are convinced the market will increasingly appreciate stable business models, due to their strong capital preservation characteristics. The stable stock universe is in a better position to withstand today’s historic inflationary pressures.