Amid a high interest rate regime, there are various scenarios about how 2024 will shape up.
In the US, scenarios of both soft and hard landings can play out depending on various conditions.
The impact of geopolitics and conflicts continues to be a big overhang on financial markets.
European markets are still heavily influenced by the war in Ukraine, and the Hamas-Israel conflict continues to affect the outlook for commodities such as oil.
How oil prices turn out will play a significant influence on how inflation plays out in 2024 – regardless of the dampening attempts from central banks, which seem unlikely to push interest rates even higher without spooking markets and the general economy.
In Asia, the big conversation is on whether China’s economy will bounce back and strengthen faith in the domestic market.
AsianInvestor asked the investment industry how 2024 could be for financial markets and macroeconomics, and how instiutional investors should allocate based on their estimates of worst and best outcomes.
The following responses have been edited for clarity and brevity.
Marcella Chow, global market strategist
J.P. Morgan Asset Management
The best-case scenario is a soft landing, where the economic growth slows without tipping into recession, while inflation subsides. The Fed may pause rate hikes but remain higher for longer until mid-2024 before cutting rates gradually.
Long-term yields are likely to remain range bound for a period before declining.
The worst-case scenario will be mild recession, with negative growth and disinflation.
The Fed may cut rates to 3.5% by the end of 2024 and to 2.5% by the end of 2025. Long-term yields may fall to 3-3.25% over the course of 2024 and increase as growth improves.
In both scenarios, we see lengthening duration via government bonds and investment grade corporate credit as an appropriate strategy.
Historically, a possible end to the US hiking cycle and a peak in rates benefited stocks with higher valuations.
Typically, falling yields are constructive for growth-style equities, such as technology stocks, as investors assume higher future growth rates to offset falling but still elevated discount rates. In addition, with potentially lower bond yields and cash returns, high dividend equities could become a decent source of income.
Having said that, these are not the only possible scenarios that could play out over the next couple of years.
This suggests that diversification, both in asset classes as well as geographical coverages, remains crucial to manage exposure and risks.
David Chao, global market strategist, Asia Pacific ex-Japan
Outside the base case, we analyse two alternative potential scenarios.
In the downside scenario, two drivers may result in a “hard landing” – an already-committed policy mistake, or persistent inflation that spurs more tightening.
The long and variable lags of policy tightening from 2023 may prove too much for the economy to handle in 2024, leading to weaker growth and faster disinflation and thus faster policy easing.
Conversely, more persistent inflation would require policymakers to keep rates higher for longer.
In the upside scenario, supply-side shocks in the US dissipate or are already gone, and mild cooling on the demand-side enables inflation to ease.
In this “soft landing”, the economy is exiting or in the process of exiting a mid-cycle slowdown.
Core inflation would fall with more certainty and more smoothly, enabling the Fed to ease sooner. This could be positive for surplus economies like the Eurozone, Japan and China, as well as twin-deficit emerging markets.
A hard landing from a policy mistake would be more beneficial for long duration bonds and equities, but these assets would underperform if inflation remains persistent.
A soft landing would, conversely, help offset generally weaker growth in China and the eurozone.
This is the kind of market with a high degree of uncertainty, so investment diversification is as important as ever.
Gregor Hirt, global CIO of multi-asset
Allianz Global Investors
In a break from consensus, we expect a recession in the US and think markets may be underestimating the extent to which major central banks will have to keep rates higher for longer.
An active approach and diversification will be essential as not all assets will perform in an era where money has a cost again.
First, investors shall consider safer staples with the potential for carry and some capital appreciation by holding US treasuries due to current high yields.
With the Fed nearing the end of its rate-hike cycle and a recession still looming, we believe that the backdrop is supportive.
Gold may also see gains in this environment.
Second, investors will monitor the oil markets which are in a push and pull between concerns about an escalation in the Middle East conflict and the outlook for global growth. The focus will be on whether Iran becomes more directly involved.
Global macroeconomic data should be monitored for signs of slowing growth that could offer buying opportunities.
Thirdly, Japanese equities are tactically favoured due to support from low interest rates and resilient company earnings. Valuations are considered attractive currently.
Finally, consider diversification across markets.
Mexico could benefit as US supply chains shift from China. We expect a turnaround in sentiment in China in 2024 and remain optimistic about long-term investment opportunities in an innovation-driven economy pivot.
Seth Meyer, head of fixed income strategy
We believe a multi-sector strategy is a great way for investors to navigate between market configurations, as it is a nimble, go-anywhere portfolio of the best themes within the US fixed income market.
For the first time in years, the fixed income market is delivering on its last name.
Following three years of headwinds of high inflation and rising interest rates, we believe the US bond market finds itself well poised entering 2024.
Now that the Fed appears to be done raising rates, and core inflation is trending down, we believe the prospects for US fixed income look positive.
We continue to see tremendous opportunities for securitised assets, such as AAA-rated CLOs, agency MBS, CMBS, or high-quality ABS.
These offer much more attractive spreads – compared to their long-term averages – than investment grade or high yield corporate bonds, hence providing an interesting alternative to more traditional fixed income assets.
Conversely, should the US economy slow down faster than anticipated, or should an exogenous shock occur, the strategy would likely reallocate further to duration assets.
If higher-for-longer rates lead to an economic slowdown, with equity markets repricing lower, investors would benefit from the counterbalance of price appreciation from bonds.
Michelle Cluver, portfolio strategist
Global X ETFs
After two years of restrictive global monetary policy, we’re potentially at a turning point.
2024 is expected to be the year when developed market policy interest rates decline.
The best-case scenario is a soft landing; with slow, but positive, economic growth, while inflation pressures subside allowing for lowered policy rates.
Longer-duration and growthier market areas could perform well as economic growth slows and prioritisation between interest rate and economic growth sensitivity favours areas that grow despite the economy.
High-growth areas such as thematic equity are likely to perform well and could benefit from increased adoption of technologies that support increased data usage and AI.
This environment is favourable for dollar-sensitive areas like emerging market equities.
While a soft landing has become the consensus market view for 2024, downside risks remain.
US consumer credit delinquencies are rising off a low base, with a slight slowdown in spending activity expected.
If economic growth reduces whilst inflation remains stickier than expected, markets may have to revise their rate-cut projections.
In this scenario, quality core exposure remains important. Shock factors may increase market volatility and drive a flight to safety – increasing the importance of diversification and quality exposure.