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2024 will be an election year in both the US and the UK, and it will also likely see more movement in the ESG and sustainability space as regulatory frameworks continue to solidify.
We look at the big trends to watch out for as Q1 unfolds.
“We believe inflation will hand over to growth as the critical macro driver of policy and capital markets in 2024,” said Tessa Mann, Director of Macro Strategy at WTW. “Recession risk remains on the cards, with hard landing risks most significant in Europe – Germany, the UK, and Canada are likely to be the first major economies to enter recession.”
“The US Federal Reserve has increased interest rates at the fastest pace
since the early 1980s’ period of high inflation."
Mann added that the broader Eurozone is also at risk, with larger economies, such as France, showing signs of weakness on important leading indicators like manufacturing and services PMIs. The French central bank said in December that economic activity will only pick up in 2025 as lower inflation boosts consumer purchasing power, falling short of the government's growth expectations in the meantime – which could affect investment appetite.
Mann said that US indicators had shown more resilience than European markets, but that there was still a risk of a mild recession as the impact of real policy tightening continued to reverberate through the economy.
“The US Federal Reserve has increased interest rates at the fastest pace since the early 1980s’ period of high inflation,” she said. “Similarly, we have had rapid policy rate hikes across the UK, Eurozone, Australia and Canada. The impact of monetary tightening on the real economy flows through with a lag, with some variation by geography. Overall, we view the risk of contraction as elevated across developed markets.”
The prospect of a soft landing was not “out of the question”, especially in the US, she said, warning that the narrative around inflation falling, some rate cuts in 2024, low corporate defaults, and robust earnings growth, appeared consistent with this prediction.
“Financial markets are also largely pricing-in this scenario. However, if inflation does fall, we think it will be because rate hikes have started to have a more material impact on slowing consumer spending, business investment, and economic and corporate earnings growth,” Mann added.
WTW, she said, estimated that real policy rates across most developed economies would be in highly restrictive territory – with the exception of Japan – and that there would only be a small chance of further hikes.
“Leading growth indicators are showing signs of weakness in various major economies, as touched on above,” she said. “Therefore, we expect that even if we get an environment of stickier-than-expected inflation, central banks are more likely to maintain policy at current rates than to hike further.”
"Barring black swan-type events, equities should continue to be
reasonably well supported going into 2024."
This view was backed by others in the market who saw new twists emerging in the high-interest rate trend. “The rampant global inflation that dominated 2023 shows signs of dissipating, but political risk will remain in the spotlight,” said Roddy Barnett, Head of Political Risk & Trade Credit at specialist insurer Beazley.
“Food and energy costs are likely to stay persistently high, which may prompt local and national unrest in developing countries, government defaults, and the seizure of foreign assets, particularly from newly installed populist regimes,” he said.
Other industry figures said they expected bullish changes to European markets in 2024 as inflation-curbing measures continued to ease. “The market is expecting rate cuts on both sides of the Atlantic by Q2 [2024]. Barring black swan-type events, equities should continue to be reasonably well supported going into [2024],” said Sharon Bentley-Hamlyn, Director at Aubrey Capital Management.
“The lack of clarity on the direction of interest rates has posed challenges in recent months, but this cloud now appears to be dissipating as we look forward to falling inflation and lower interest rates in 2024,” she said.
In the US, however, there were mixed ideas around the 2024 outlook – specifically the direction in which inflation and interest rates would head.
Last year, most thought the US would see receding interest rates for the election year, but the US Federal Reserve (Fed) made few moves at the end of 2023. “Barring any new 'risk premium' event in the energy sector, we'd share the view that the steady rate of disinflation in the US will continue through 2024, a continuation of the steady progress made in this area throughout 2023,” said Joe Tuckey, Argentex’s Head of FX Analysis in December.
“Inflation is falling faster than the Fed had thought,” he added.
Mann agreed, saying that, because of current conditions, US inflation-linked bonds would be a useful addition to portfolios. “In a world of elevated downside risks and uncertain inflation due to cyclical conditions and structural shifts, this is especially true as real yields have risen significantly over the past couple of years and offer attractive value from a medium-term perspective.”
However, she added that current bond market projections – of policy rate cuts beginning early in the year – were “optimistic” and disregarded a material softening of economic data. “This appears more likely for Europe and Canada than the US,” she said.
The war in Gaza has dominated headlines over the past few months, as have continued hostilities in Ukraine, and a flare-up of tensions in Venezuela and Guyana – which produce millions of barrels of oil per day. Increasing geopolitical tensions could decide where new investment opportunities lie and continue to dominate market conversations.
"Ongoing economic uncertainty continues to be a key
source of concern for 25% of global executives."
“Geopolitical instability will continue to [be] the focus of many businesses,” said Beazley’s Barnett, referring to the insurer’s Risk and Resilience study. “Nearly a quarter of businesses surveyed (24%) believe that geopolitics will be a key risk that they must navigate. Barnett identified Ukraine, Gaza, and the potential for flare-ups in the Straits of Taiwan and Hormuz as examples to watch.
“Alongside [this] risk, ongoing economic uncertainty continues to be a key source of concern for 25% of global executives,” Barnett said, adding that the economic environment and heightened risk of insolvencies across supply chains had prompted greater awareness of trade credit insurance and the security it confers. “I anticipate that this area will continue to grow next year,” he said.
The US election is also looming.
Historically, the US market reaction has been a limited S&P 500 adjustment to new presidents, said Mann, when discussing where investors should put their money in 2024. Nevertheless, the US presidential election will likely have a noticeable effect on global markets, impacting predictions on where to place money.
“We continue to monitor global policies, particularly as they relate to changes in government industrial policy, investment, and fiscal spending,” Mann said – a sentiment that was echoed by others.
“2023 has seen a third consecutive year of negative performance for US Treasuries, casting doubt on the sustainability of this trend for a fourth year,” said Eric Vanraes, Portfolio Manager of the Strategic Bond Opportunities Fund at Eric Sturdza Investments. “Initially, bonds were expected to rebound in 2023, but shifts in inflation expectations have postponed this recovery.”
Vanraes said that, looking ahead to 2024, there were several key risks to consider, including the volume of new issues by the US Treasury. “The Treasury will have to significantly increase the volume of its new issues, and auctions have the potential to go badly, as happened recently with the 30-year bond,” he said. “The main international investors in the primary market for Treasury bonds – China, the Middle East, and above all Japan – are less and less interested, if at all, in these issues.”
Mann said that a diversified, actively managed portfolio continued to be the best bet for investors looking to protect themselves from both broad categories of risk – “known unknowns”, such as the conflicts in the Middle East and Ukraine, and “unknown unknowns”, which by definition are tail risks challenging to forecast.
“We think Japanese equities are in a regime shift following big moves forward in corporate governance and economic policies in recent years; our view is that strong Japanese equity performance has more room to run,” she said. “The yen has depreciated significantly over the past few years making it more competitive. In October 2023, the Bank of Japan relaxed its yield curve control policy, and we are expecting further policy change [in 2024] to catalyse yen appreciation.”
Due to these factors, it’s likely that 2024 will be an active year for the investment community.
