By the time kids head back to school in January 2024, many of us may have to revisit some subjects from our own curriculum.
The economics of the past decade, with ultra-loose monetary policy, is not a standard playbook for the decade ahead. 2024 will go down as the “year of elections”. Meanwhile, the pursuit of science to address climate change and the engineering marvel of generative artificial intelligence (AI) will be unrelenting in changing our lives forever.
2024 will be a pivotal year that catapults the world into a new era as countries re-adjust to a web of economic drivers, multi-polar politics and re-fashioned supply chains.
This year, US growth has been resilient despite the Federal Reserve (Fed) lifting interest rates to curb inflation. Large budget deficits, tight labour markets and excess savings from the pandemic have driven economic activity. These trends may reverse in 2024 as unemployment, lower fiscal stimulus and falling savings lead to a slowing US economy. With our forecast of a mild US recession and core inflation falling below 3%, we think the Fed will cut rates each quarter from June 2024 onwards – with 25bps cuts in June, September and December – to avoid a further slowdown. Apart from this mild recession scenario which we ascribe a 50% chance to, we factor in a 30% probability of a “soft landing” scenario where a US recession is averted but growth continues to weaken and core inflation eases below 3%. The Fed’s rate cuts may be less pronounced and delayed in this case.
Hence, we take a more sanguine view on risk within investment portfolios at the end of the rate hike cycle, and advocate for investors to adjust portfolios strategically in preparation for 2024.
We upgraded our overall risk stance in our tactical asset allocation from Underweight to modestly Overweight this month. In fixed income, we upgraded our Underweight position in DM HY bonds to Neutral and favour duration i.e. the long end of the curve (8 –15Y). In equities, we move from Underweight to modest Overweight, with a shift in allocation to European equities from Underweight to Neutral. We remain Neutral on US and Asia ex-Japan stocks and continue to favour Japanese equities.
Even though the increased allocation to cash deposits – a stable source of yield in the midst of volatility – served investors well in 2023, this is an opportune time to access a wider source of yield. As the interest rate outlook stabilises, investors can build a diversified portfolio of income-yielding assets including stocks, bonds and private credit. Identifying quality stocks and bonds linked to companies with favourable fundamentals is also back in focus for alpha generation.
2024: The year of elections
Almost 40% of the world’s population will head to national polls next year, in over 40 countries that represent over 40% of global GDP. November’s US presidential election will take centre stage, with implications across geopolitics, economics and business.
Public policies could also impact specific sectors. Historically, biotech, industrial, and healthcare sectors tend to be favoured under the Democrats, while pharmaceuticals and airlines tend to outperform when Republicans are elected. How the US navigates its contentious relationship with China will also be a prominent foreign policy topic in the upcoming election. Volatility will likely escalate in the run-up to the election, though history has shown that the stock market tends to re-focus on fundamentals once uncertainty fades.
Focusing on “real returns” in 2024
Inflation appears to be on track in moving towards central banks’ 2% targets by 2025. This comes after the Fed and European Central Bank’s (ECB) aggressive rate hike cycle over the past 2 years to bring the fed funds rate to 5.25-5.50% and ECB deposit rates to 4.00% to combat inflation.
With inflation under control and growth at risk, we expect the Fed and the ECB to start reducing interest rates from June 2024 to the benefit of risk assets. Investors should focus on investments with real, or inflation-adjusted, returns and on companies with resilient business models and margins. Quality companies with strong balance sheets, cash generating capabilities, low levels of net debt and resilience against tighter financial conditions remain our focus.
Fast forward to the future
Technological disruption is creating compelling opportunities for investors looking for longer-term growth drivers. As generative AI moves from training to inference hardware, we see a proliferation of AI applications that can drive productivity, enhance creative content production and radically transform customer experiences. Selected Chinese internet/platform companies that demonstrate operating resilience may benefit from the broad recovery of China’s economy, as well as the wider adoption of AI and the consumption of digital services.
As data is the foundation of these new business models, cloud computing, big data and cyber security companies are important enablers. Demographic trends of aging populations, higher wages and tight labour markets also favour technology substitution from human labour.
Harnessing the power of sustainability
At the COP28 climate summit earlier this month, around 110 countries pledged to triple renewable energy capacity by 2030. Global government support, higher power prices, better efficiency and volatility in energy markets all play into the adoption of clean energy. Despite short-term challenges for energy transition stocks, the long-term structural story for green mobility, renewables and smart grids remains compelling.
Companies in the food value chain are also in focus as food production accounts for around 35% of total greenhouse gas emissions. Climate change has impacted food system resilience, raised food prices and reduced availability.
What does this mean for investors?
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