2024 predictions: Inflation pressures to cool in big election year
This is a four-part series of thematic predictions for 2024. This is the second story.
Inflation is sliding lower in the US, potentially clearing the way for a much-awaited Federal Reserve policy pivot from rate hikes to rate cuts.
That seems to be the biggest bet investment managers are making for 2024.
Yet this year is also an election year, with several major economies due for national elections, so the overall global economic outlook remains fairly muted despite hopes of easing monetary policy.
“We expect a cumulative 75 basis points (bp) in policy rate cuts in 2024, with the first 25bp reduction occurring in June. We expect an additional 75bp of rate cuts in 2025. The federal funds target range would fall to 4.50-4.75% at end-2024 and 3.75-4.00% at end-2025,” an HSBC global research note dated January 3 said.
Natixis IM
Some investors expect rate cuts even earlier.
“Markets are now anticipating five rate cuts for next year as early as March,” Mabrouk Chetouane head of global market strategy at Natixis Investment Managers, told AsianInvestor.
Still, interest rates are expected to settle down at a higher level than those seen between 2008 and 2019, when interest rates were essentially zero.
“A number of real factors, together with higher underlying inflationary pressures, point to policy rates averaging 4.5% or higher over the next decade,” Shamik Dhar, chief economist, BNY Mellon Investment Management, told AsianInvestor.
SLOWING ECONOMIC GROWTH
Despite cooling inflation, the global economy is out of the woods just yet, especially as bets grow of the world’s largest economy dipping into recession in 2024.
“We expect a substantial slowdown in global growth, including - most likely – a mild recession in the United States in the first half, while Europe as a whole can avoid a severe recession and recover in the second half,” a 2024 outlook from Pictet Wealth Management said.
BNY Mellon IM
Global growth is projected to slow for the third year in a row—from 2.6% last year to 2.4% in 2024, almost three-quarters of a percentage point below the average of the 2010s, according to a World Bank report issued on January 9.
Advanced economies are mostly responsible for the weak momentum of world economic growth, while emerging markets should remain more resilient, with Asia ex-Japan likely to be the main contributor, the Pictet WM report noted.
POLITICAL RISKS
And while inflationary pressures seem to be fading, political risks are rising.
More than 50 countries are due to hold national elections in 2024, including the US, UK, Russia India, Indonesia, Russia, Mexico and South Africa.
The US and Taiwan elections could have the biggest impact on global financial markets, according to Aviva Investors.
“A heavy election year means fiscal issues will rise in prominence, contributing to volatility in financial markets,” the Pictet WM report said.
“The risk of seeing investors disappointed is in our opinion quite high, which will certainly lead to high volatility in bond markets during the first quarter,” Natixis IM’s Chetouane noted.
While there may be some appetite to move from cash to long-duration bonds, most investors will be in ‘wait and watch’ mode as they wait to see how political and economic events unfold.
T Rowe Price
“This is not a time to ‘be a hero’ and take large bets in asset allocation,” Thomas Poullaouec, head of multi-asset solutions for APAC at T Rowe Price, told AsianInvestor.
“As the stock-bond correlation is constantly shifting, investors need to stay diversified, taking advantage of attractive yields for now.”
DEFENSIVE STANCE
If recession does strike the US, the world’s largest economy, investors should seek cover in defensive assets such as long-dated government bonds, or the dollar and Swiss franc to a lesser extent, according to Natixis IM’s Chetouane.
“If the risk of stagflation [stagnating growth with inflation], then money market solutions and stocks that manage to take advantage of … price growth should be favoured. Companies with pricing power and low price-elasticity can protect investors.”
Point72
China – the world’s second-largest economy – also appears to be stabilising after a weak patch through the second and third quarters of 2023, according to some experts.
“Deflation concerns [in China] are expected to continue in 2024,” Joy Yang, head of Asian economic research at hedge fund Point72, told AsianInvestor.
“Some sectors, such as the property sector, will face bigger deflation pressures than others in 2024,” Yang added.