Welcome

Economies were more resilient than expected in 2023, especially in the US, thanks to resolute consumer and government incentivised expenditure programmes.

However, the rapid increase in interest rates is likely to slow economic activity in 2024 and inflation will continue to fall. We are more sceptical of a soft landing than consensus and anticipate the increasing focus on growth will lead western central banks to follow Emerging Markets (EMs) in cutting rates in the first half of the year. This represents a favourable backdrop for fixed interest assets - history shows that once the Fed starts easing, it does so quickly.

Peter Dalgliesh
Chief Investment Officer

We believe we're late cycle, so we’re taking a cautious approach to risk assets. That said, selective opportunities are available in Small and Mid caps, emerging markets (EM) and quality for long term investors, offering growth exposure if markets look through the anticipated economic weakness.

While the short-term outlook appears challenging economically, as we move through the cycle it sets us up nicely for the recovery and expansion phases, which typically support attractive investment returns. For committed long term investors the outlook appears reasonable, albeit with some inevitable twists and turns along the way. So, stay diversified, remain disciplined and don’t give up on the 60:40 portfolio.

Key considerations

Global GDP growth is expected to slow to below trend.

Bank lending activity will remain subdued, with lending standards staying high as they err on the side of caution to protect balance sheet strength.

Disinflation will continue, but at a slower pace. Decline in rent and service sector prices will catch up with weakness in goods prices. The Fed and ECB look likely to meet their inflation targets later in 2024; the BoE path looks longer.

Liquidity will continue to be withdrawn as central bank quantitative tightening persists.

The Fed message of ‘higher for longer’ will pivot to ‘lower and faster’, as growth becomes the primary focus and the presidential election approaches. The BoE is expected to be later in cutting interest rates, but then move faster.

Over 40% of the global population goes to the polls in 2024 heightening scope for policy change.

High yield credit spreads are at risk of widening as defaults rise.

Long term government bond yields will fall as growth slows, but the yield curve will steepen as the short end comes in, leading to a bull steepening.

Money supply growth is unlikely to materially improve until the latter part of the year acting as a constraint on economic activity. Things will improve late 2024, offering upside into 2025.

Labour market tightness will ease as outstanding vacancies shrink, participation rates rise & unemployment nudges higher.

Elevated budget deficits leave little room for election give aways and fiscal profligacy – markets expected to think dimly of parties taking this approach.

Consensus earnings forecasts look vulnerable to disappointment. Downgrades are expected as sales volumes remain sluggish and margins unsustainably high.

Key opportunities

Having lagged through 2023, quality is expected to regain investor favour drawn by the appeal of recurring earnings growth and cashflow, feeding the compounding of returns.

As rates fall, the flight to cash seen in 2023 is expected to unwind, which is good for bonds.

Small caps appear priced for recession, offering relative downside protection. Combined with a peak in interest rates, history points to this being an opportune time for small caps.

Emerging Markets are cheap, unloved and under-owned. Supportive domestic fiscal and monetary policies are expected to extenuate the growth differential with DMs, which combined with a plateauing of the US dollar is expected to buoy the asset class.