Persistently high inflation in 2023 meant that global central bank pivots (or pauses) failed to arrive as quickly as market hoped. As a result, hesitant investors are reluctant to enter the market, with many sitting on the sidelines, holding cash rather than staying invested.
Going into 2024, how should market participants recalibrate their expectations and remain invested as global central bank rate paths may shift? What resilient solutions could investors hold to manage their wealth and look beyond this “yet-to-be-defined” economic cycle?
The global growth picture remains uncertain despite displays of resilience in parts of the world. We’ve identified three key themes that could influence the way we think about asset allocation in the coming months.
U.S. Recession: the worst-case scenario for markets?
We expect the U.S. economy to post two consecutive quarters of negative GDP growth, but regardless of whether we meet the technical definition of a recession, lending activity, consumer spending, capital investment, and corporate earnings are likely to weaken in the coming six months.
This next recession could be different: Continued resilience in the labor and housing sectors as well as signs of a recovery in the manufacturing sector could limit any expected negative impact on growth. Financial markets, which are forward-looking by nature, may well ignore what’s in front of them and look straight through to the recovery on the other side of the recession.
A soft landing in which growth slows but remains positive may create a more challenging environment for markets, particularly if such an outcome encourages central banks to remain hawkish. In this scenario, growth could stagnate and remain below 1% for a prolonged period, leading to a more difficult environment for investors.
United States:
We may be forecasting a U.S. recession; however, active asset allocation processes aren’t based on absolutes. Rather, they’re based on the concept of relative values and opportunities. In that sense, the U.S. markets continue to offer the best opportunity for investors as global growth slows. The U.S. economy continues to benefit from a resilient consumer, a strong labour market, and slowing inflation.
Europe and other Developed Markets:
2024 could be challenging for Europe as the region confronts weakness in both its services and manufacturing sectors. Growth in developed economies such as Canada and Australia may be capped because they tend to be more sensitive to elevated interest rates.
Emerging markets:
Emerging-market economies could also struggle under the weight of higher oil prices, slower Chinese growth, and a strong U.S. dollar. That said, the current negative sentiment toward Mainland China may be overdone, creating some near-term tactical opportunities.
