What’s in store for 2024?
The financial landscape of the past year has defied conventional expectations. Contrary to initial forecasts, the absence of a recession, unexpected equity market rallies, and a notable sovereign bond market volatility have characterized 2023. As we venture into 2024, what lies ahead? Swissquote’s Ipek Ozkardeskaya and NFG Partner’s Glenn Coxon share their insights on what’s to come.
Recession never came.
2020 was the year of Covid. 2021 was marked by supply chain chaos. 2022 saw inflation return after more than a decade of low-to-no price pressure. 2023 was marked by an aggressive monetary policy tightening from the world’s leading central banks to fight inflation.
Fighting inflation required slowing economic activity. Yet, the US and the world economy avoided recession in 2023 defying the aggressive global monetary policy tightening from the US Federal Reserve (Fed) and most major central banks including the European Central Bank (ECB), the Bank of England (BoE), the Reserve Banks of Canada, Australia, and New Zealand.
The US yield curved remained deeply inverted throughout the year, keeping the recession worries alive and funded, but a noteworthy interruption in the typical 12-month cycle has occurred thanks to substantial US fiscal spending and the advent of the AI trade. The latter prevented the US economy from slipping into recession. As such, 2023 was marked by a narrowing of markets, where “Magnificent 7” was responsible for most of the upside in US equity indices. The FTSE 100 lagged behind its US peers, the European indices performed relatively well, although the European luxury companies found out that the Chinese post-Covid reopening optimism was overblown. China, on its end, struggled with slowing inflation and worsening property crisis, while Japan remained outside the monetary policy tightening game and amassed the benefits of cheap yen and increased geopolitical tensions between China and the West.
Watch our Market Outlook 2024 — Equities here:
A tapestry of growth and uncertainty for 2024
The 2024 growth and inflation outlook vary across major economies.
The US printed a strikingly strong economic growth in Q3 and faces a slowing trajectory, but the US government will likely continue to spend throughout the election year and robust government spending should give support to the world’s leading economy.
Elsewhere, Europe anticipates flattening growth, falling inflation and a softer ECB stance, whereas China will do its best to prop up investment and growth by announcing more monetary and fiscal stimulus.
While a global recession remains a potential scenario, attention is directed towards triggers, with rising geopolitical tensions, US household debt, challenges in commercial real estate, Chinese deflation and property crisis emerging as sensitive points.
Monetary policy dilemma: the Fed is ready to cut, others… less enthusiastic.
2023 was marked by thorough rate hikes from major central banks except for Japan. 2024 will likely bring the Bank of Japan (BoJ) to its knees and see the first-rate hike in Japan: the BoJ will likely exit negative rates at a time the other major central banks will start reversing their tightening policies. Hence, long Japanese yen is seen as the most obvious FX trade for next year.
For the rest, the million-dollar question for the upcoming year revolves around the timing and the size of the potential rate cuts from major central banks. The US Federal Reserve (Fed) closes the year with a surprise dovish shift, other central banks including the European Central Bank (ECB), the Bank of England (BoE) are skeptical regarding a premature policy tightening as inflation risks loom.
The contrast between the resilient US economy adopting a dovish stance and faltering European economies holding on to a hawkish position gives the impression that the ECB and the BoE will feel the pressure to soften their tone if the Fed starts moving south.
Investment Strategy in an Uncertain Environment
In 2024, the interplay of monetary policies, economic factors and geopolitical tensions will likely shape investment strategies, emphasizing the need for adaptability and a keen awareness of global dynamics.
Equity markets present a less enthusiastic outlook, prompting a preference for the equal weight S&P500 and a potential reflation trade, emerging markets (EM) spark interest, and there is a cautious optimism regarding the European equity landscape.
Watch our Market Outlook 2024 — Commodities here:
In commodities, gold could benefit from lower sovereign yields and emerges as a favoured investment over long-term US government bonds, reflecting concerns about the US fiscal discipline and the true value of the dollar. The energy market, particularly crude oil, carries a cautious outlook due to a soft economic environment, even though limited CAPEX is a formidable force for the long term. The controversial uranium is identified as a potential candidate to shoulder the energy transition, with nuclear power gaining acceptance.
If you’re eager for more, make sure not to overlook our engaging and enlightening discussion with NFG Partner’s Glenn Coxon!
