This note summarises our 2024 Investment Outlook, from the key forecasts and expectations underpinning our investment strategy to what they mean for asset allocation and how we invest in flagship portfolios. We will share our detailed views next week. Please contact your Client Advisor for the latest update on your portfolio. Comments on recent performance are not indicative of future performance.
Macro outlook
In 2023, we’ve seen a sharp rise in interest rates, a fall in inflation from high levels and slowing growth. We believe rates are now at their peak in the Western world, as are government bond yields. In 2024, we think economic growth will slow further before a shallow recovery in the second half of the year as central banks, given lower inflation, begin cutting rates.
- A year of two halves: US, Eurozone and UK growth are all likely to decelerate further, and we see a probability of a shallow recession – though this seems more likely in the Eurozone than in the US, with the UK in between. However, as the impact of past rate increases feeds through to the economy and further slows inflation, rate cuts in the Western world could come from the summer and boost growth. Overall, the world economy will likely avoid a global recession.
- Inflation slows, and rate cuts follow: Inflation will continue to decelerate, while remaining above central banks’ target of 2%. As growth and inflation slow, interest rate cuts should follow from the middle of 2024. This means that, by recalibrating post peak rates, bond yields are likely to decline. In turn, the dollar should weaken slightly against the euro and sterling when the Fed cuts rates.
- China’s woes continue: The pick-up of the Chinese economy post-Covid didn’t materialise to the extent markets envisaged initially. Instead, China is suffering from a real estate crisis, low consumer confidence and lower-than-target inflation. Given these headwinds, we’re forecasting a slowing of Chinese growth. However, an outright recession seems unlikely given ongoing stimulus, albeit modest, from the Chinese Government and the People’s Bank of China.
- A more fragmented world: There will be several idiosyncrasies to monitor in 2024, which could lead to bouts of volatility. We are in a much more fragmented world than we were 5-10 years ago. 2024 will see important elections as the US, UK, Belgium, Taiwan, India, and Indonesia all go to the polls. We’re moving from a world dominated by central banks’ monetary policy to one where Big Government is a key factor. Fiscal, industrial and even foreign policies will likely play bigger roles in differentiating winners and losers across and within asset classes.
- Innovation to continue apace: One way to cut through the market noise is to take a longer view. We are convinced that innovation will likely continue apace in the long term, and there are many areas where new business models are emerging. Markets can adjust to these trends quickly, as we’ve seen with ChatGPT and AI, or China’s demographic inflection point, in 2023. Typically, though, it takes many years. Our key themes span the planet, productivity and people categories, which are positive for markets and tend to encourage growth.
Asset allocation & flagship portfolio implications
Overall, we still own more high-quality bonds than normal, less credit and fewer equities. But, as we don’t forecast any further interest rate increase and expect some rate cuts in the second half of 2024, we’re slightly increasing our equity allocation. That said, we can’t ignore some risks of a deeper recession materialising alongside ongoing geopolitical risks. Given these lingering concerns, diversification is our key message for 2024.
- Equities | Moderating our slight underweight: Rising interest rates were the biggest headwind to equities in 2022-23. We believe that headwind has passed, leading us to slightly increase our allocation to equities. We still own fewer equities vs our long-term allocation and continuing to hold low-volatility stocks and, generally, high-quality stocks with strong balance sheets. But we are now increasing our exposure to UK equities as valuations are now attractive and reflect the shallow recession we expect in the region. We’re also buying developed Pacific equities (excluding Japan). These should benefit from the growth dynamics associated with emerging market economies and Asia, which, as an integrated block, is somewhat less connected to the rest of the world and driven more by its own dynamics.
- Government bonds | Attractive as rates peak and then fall: In our 2023 Investment Outlook, we spoke of bonds finally providing a source of diversification and return after years of low yields. That hasn’t changed: now that interest rates have peaked, and with central bank rates projected to decrease as growth and inflation moderate, they are even more attractive. Therefore, in our balanced portfolios, we are keeping our preference for high-quality government bonds in the US and the UK. In our defensive profiles, we increase our exposure to US Treasuries. These not only provide a good return for low risk, but they also help protect against any hypothetical downturn in equity markets.
- Corporate bonds | Reducing riskier credit: Throughout 2023, we held fewer corporate bonds relative to our long-term asset allocation, and we’ve decided to reduce that further as we think the interest rate differential over government bonds doesn’t reflect the increase in default rates we expect. Of those we do hold, from a valuation perspective, we generally prefer investment grade over high yield and financials over non-financials, which we tend to implement in our bespoke and advisory portfolios.
- Commodities | A hedge against uncertainty: We are diversifying our commodity exposure into a broader allocation, which can help protect portfolios from any short-term uncertainty in geopolitics and energy prices, as well as capitalise on any upside surprise in growth even though it is not our base case. In balanced and dynamic portfolios (with a higher allocation to riskier assets potentially providing more return but also more volatility), we’re adding broad commodities. We’re instead reducing our gold allocation as prices are at all-time highs and look less attractive given the yields that high-quality bonds offer as an alternative source of safe-haven return.
Thank you for your trust and continued support this year. Whatever your needs, we will provide objective insights, advice, solutions and services tailored to your personal goals. For further information, reach out to your Client Advisor, and stay tuned for our full 2024 Investment Outlook next week.
Daniele Antonucci
Co-Head of Investment & Chief Investment Officer
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Information correct as of 4 December 2023.
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