What’s in store for 2024?

The Global Investment Outlook – 2024

Looking into the crystal ball – what is in store for 2024? Elections and interest rate cuts!

Inflation is coming down, but for some economies, the last mile may prove more difficult. Encouragingly US PCE inflation fell below the Fed’s 2% target in November. 

Central banks are expected to cut interest rates – The Federal Reserve (Fed) has led the pack by signalling three cuts in 2024 amounting to 0.75% in total. Markets are pricing in a US interest rate cut by the end of Q1 and greater cuts in 2024 of 1.5%. The risk is that cuts are made a little later and slower than currently priced by markets, as central banks are likely to remain cautious.

With interest rates set to move lower in 2024, investor and business confidence should improve. The US economy looks to be heading for a soft landing, with sub-trend growth in the first half of the year – but not a deep recession. Global growth should gather pace in the second half of 2024 after a lacklustre start, but China could still prove a drag.

There looks to be some scope for a further fall in Bond yields, however government borrowing levels in some of countries could pose a risk. For example, Moody’s, the only one of the three large credit rating agencies to rate the US as ‘AAA,’ recently put it on a negative outlook.

2024 will be the year of elections

Forty countries are expected to hold elections. This includes four of the world’s five most populous countries, and in total elections are set to cover over 40% of both the world’s population and GDP.

The year starts with the election in Taiwan, which will likely govern Beijing’s Taiwan strategy with the prospect of even greater ‘grey zone’ activity against the island. In the UK, Labour is expected to win (in May/June or October?) and the market is more comfortable about its business-friendly approach. The US is more of a curve ball. On November 5^th, are we really looking at Trump V Biden again and even the possibility of a Trump ‘dictatorship’? The US political backdrop looks uncertain and is a key risk for 2024.

In the UK, better than expected inflation data at the end of the year has brought interest cuts into play for the first half of 2024. This, together with the likelihood of a change of government to a fairly ‘centre leaning’ Labour party, provides the scope for UK sentiment to improve considerably and for the UK equities discount narrowing against global peers.

Geopolitical tensions will continue to overshadow – war in Ukraine, the Middle East and Taiwan – the US presidential election in November will be particularly important. A Trump win would present a massive challenge for both Ukraine and NATO. Meanwhile, Tehran-backed Houthi drone attacks from Yemen on shipping in the Red Sea could disrupt global supply chains. The Middle East conflict could yet escalate further with the US having to address Iran’s involvement, given the increasing attacks on Northern Israel by Hezbollah.      

The war between Russia and Ukraine grinds on with neither side gaining the upper hand, but war weariness is starting to impact some of Ukraine’s western allies, particularly given the US presidential election in 2024. Putin is digging in for the long-term and has ramped up Russia’s defence spending materially.  While it is likely the war will drag on throughout 2024, it cannot drag on indefinitely, with a negotiated settlement the only solution that for now both sides continue to refuse.

US/China trade – the long-term strategic trade cold war continues and in the latest move the US is proposing tariffs on Chinese EVs for the US market, while China continues to restrict the supply of some rare earth minerals

AI will continue to evolve rapidly – the ‘magnificent seven’ Amazon; Apple; Alphabet (Google); Nvidia; Meta Platforms (Facebook); Microsoft and Tesla were the standout winners in 2023, but can US valuations continue to defy gravity? US earnings expectations for 2024 remain strong (c.11% growth) while US equity valuations remain above the long-term average (albeit mainly due to the ‘magnificent seven.’

The US Dollar is expected to move lower as global growth recovers and interest rates are cut which should be supportive of emerging markets

Japanese equities saw a significant re-rating in 2023, but the Bank of Japan is expected to formally exit Yield Curve Control this year, accelerating the repatriation of Japanese capital which may require other assets to be sold to fund government

Will China overcome its property slump? Beijing is banking on global EV exports to revive its export fortunes, but more stimulus may be required to support the domestic economy. The Evergrande restructuring court case is due in January.

Summary

As ever, there are many moving parts for the outlook in 2024. However, one thing is clear that the cycle of interest rate hikes is over. However, the question is how quickly will rates move lower? Markets are far more optimistic about the scale and timing of cuts compared with central bank guidance, so there is scope for disappointment. However, will central banks be forced to shift their more cautious stance if economic growth slows or unemployment rises? Given that global economic growth should gather pace in the second half of 2024, we would expect equities to grind higher, but with the US political situation posing the greatest risk to sentiment.

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.