Annual Investment Outlook 2024
Entrenched disinflation: The trend of falling inflation will become entrenched in 2024, with CPI inflation falling close to target in most developed markets by the end of the year. This will provide support to real income and spending growth in the near term, whilst offering space for lower interest rates, as central banks gradually recalibrate policy from their current restrictive stance.
US economic moderation: Having rejected the consensus expectation for recession in 2023, we expect the US economy to moderate in 2024, with growth slowing from the current six month run-rate of 3.5% per annum. This is primarily because of lagged headwinds from higher rates, cooling demand for labour, and the exhausted fiscal boost from 2020-21, all weighing on consumer activity. However, a recession, defined as ‘broad based economic weakening’, remains unlikely in our view, with real income growth providing crucial support. If it does happen, it will likely be mild and short-lived in comparison to history, considering the lack of structural imbalances.
Delicate European recovery: Economies in Europe (including the UK) have stagnated for most of the past two years, as painful inflation has combined with little economic growth. The good news is that most of the economic pressure has passed, and entrenched disinflation will provide a much-needed tailwind to consumer spending. However, headwinds from China’s growth slowdown and restrictive fiscal policy will weigh on growth momentum.
China’s structural slowdown: We urged caution towards China and broad emerging markets last year, despite post zero-covid enthusiasm, and remain sceptical that the world’s second largest economy will re-emerge as a growth powerhouse anytime soon. China’s economic challenges require many years of deleveraging and rebalancing, a path the authorities are willing to follow. Whilst we see evidence of stabilisation, a catalyst for resurgent growth momentum remains elusive.
Equities – staying constructive: Equity markets have closed the year on the front foot, with participation broadening beyond the dominance of the ‘Magnificent 71 ’ technology giants. For globally diversified investors, this represents a welcome development following market declines in 2022 and a concentrated recovery for most of 2023. Central to our multi asset process is a focus on the potential real equity return over a full market cycle, which continues to support equity allocation.
Fixed Income – the return of diversification: With entrenched disinflation the expected macro backdrop, and recession risks not to be dismissed, the risk reward for core government bond investment is favourable. Our allocation has incrementally increased from near zero in 2021, and now offers both real return and key diversification properties for multi asset portfolios. Credit offers competitive all-in yields and remains a core allocation in fixed income portfolios, with a bias to investment grade.
Alternatives – an attractive blend of non-core asset classes: Having registered double digit gains last year, the outlook for insurance linked bonds remains particularly enticing with high underlying yields. Long / short equity and physical gold offer additional volatility anchors, delivering valuable returns this year. With the risk of market dislocation ever-present, we retain conviction in these uncorrelated alternative assets for 2024.
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