2023 was a year marked by inflation, slowing growth and the fastest pace of rate increases in the last ten years. For 2024, these themes remain, adding to the possibility of a recession in both the US and Europe. Therefore, international managers look to 2024 with some uncertainty, with the tragic situation in the Middle East being one of these main sources of uncertainty.
In this context, FundsPeople asked large international managers operating in the Iberian market what their prospects are for 2024. These are their answers, published in alphabetical order.
“From an economic point of view, last year was characterized by resilient growth in the USA, but by weakness in Europe and China”, begins by stating Álvaro Antón Luna, responsible for abrdn for the Iberian Peninsula. Central banks are in the final stages of a sharp cycle of interest rate hikes and inflation has eased, although it has not yet returned to target.
Looking ahead, at abrdn they are not convinced that the US economy can remain as strong as it has been, as support from consumer savings reserves runs out, and expect a slight recession in 2024. “Europe and the United Kingdom are already in practically the same situation, but should recover next year”, he adds.
China must stabilize itself in the context of policy easing, which has now become favorable. As far as inflation is concerned, the last steps of the decline in global inflation may prove to be the most difficult, as the easy victories of energy base effects and supply chain normalization are behind us.
“Our basic scenario is a gradual and controllable slowdown in the world economy, accompanied by an equally gradual fall in inflation – although we hope it does not reach pre-pandemic levels”, says Miguel Luzarraga, head of business at AllianceBernstein for the Iberian Peninsula. In most respects, their current base case is the optimistic scenario they presented a year ago.
Therefore, you would be remiss not to recognize the risks surrounding your expectations. “With the high policy rates and the slowdown in the economy, it is likely that the vulnerability of the global economy to shocks has increased”, adds the professional. While past shocks have been comfortably absorbed, future shocks may not be as easy to manage. A busy global political calendar, lingering geopolitical tensions, and a variety of unknowns could become problematic, causing a negative tilt in the balance of probabilities of your base case scenario.
Investors often hear that past performance is no guarantee of future results, and the same applies to the economy. “Investors should be optimistic about the possibility of the next few quarters being reasonably good, but also paying attention to events that could change the scenario”, he concludes.
According to Stefan Hofrichter, chief economist at Allianz GI, as interest rates begin to stabilize, a new investment environment begins to emerge with opportunities that – quite possibly – we have not seen for years. Portfolio diversification, and making bolder, conviction-based decisions, can be essential at a time of divergence in performance between companies, asset classes and economies.
“Uncertainty remains high, even more so with the potential for a shock to oil prices and the implications of the November US elections. The good news is that investors may be rewarded for taking risks again,” he says.
In terms of prospects for 2024, for Allianz GI it appears that: (i) contrary to consensus, there may be a recession in the US and they think that markets may be underestimating the period of time in which major central banks will have to maintain higher rates, (ii) it will be essential to adopt an active approach to investment selection and management, (iii) markets may experience volatility due to macroeconomic and geopolitical uncertainty, (iv) conditions are being created for bonds to become attractive and see entry points into stocks, focusing on quality names and themes, and (v) diversification will be essential.
Amundi predicts a gradual weakening of growth in 2024, mainly due to a slowdown in developed markets. “As long as the geopolitical crisis in the Middle East remains contained,” says Victor de la Morena, Investment Director at Amundi Iberia. The manager estimates global GDP growth of 2.5% in 2024 (0.7% in developed markets versus 3.6% in emerging markets).
The US will face a slight recession in the first half of 2024, while eurozone growth will remain slightly positive. Emerging markets will continue to more resilient but also more fragmented, with Asia standing out as a clear beneficiary of investment flows.
With weaker demand, inflation is expected to approach central banks’ targets by the end of 2024. Speaking of central banks, Amundi expects them to maintain a pause during the first half of the year, until inflation appears to be more controlled. After that, they expect the Fed and the ECB to cut rates by around 150 and 125 basis points, respectively, during the year.
In a context of interest rates at record highs, Amundi considers bonds to be a key asset. “We prefer government debt and quality corporate credits. We will gradually increase duration and selectively consider emerging market debt,” says Victor de la Morena.
In equities, the disparity in valuations and the depletion of excess liquidity could lead to greater volatility, so they are defensive and focused on resilience, dividend sustainability and quality; and on issues such as the energy transition or artificial intelligence.
As for emerging markets, they see them as an important growth driver, preferring bonds in strong currencies to consider the local currency once the Fed changes course, looking for longer-term stories, such as nearshoring or the winners of the energy transition and technological advances.
The context of lower growth and inflation could favour a return to a negative correlation between bonds and shares, highlighting the importance of diversification, in the opinion of Victor de la Morena. In this scenario, real and alternative assets can contribute even more to traditional diversification. “In addition, gold can offer protection against geopolitical risk and some commodities can serve as a hedge against inflation”, he concludes.
While in the US a new form of fiscal stimulus continues to offset much of the monetary tightening, the eurozone displays less protection against the usual effects of higher interest rates, which are being fully transmitted to the banking sector.
“For 2024, we expect an even broader transatlantic decoupling. The balance of risks is also clearly more tilted to the downside in Europe than in the US,” says Gilles Moëc, chief economist at AXA IM. Indeed, the tragic situation in the Middle East is a significant source of uncertainty and, if it escalates, it is highly plausible that oil prices could significantly exceed $100 per barrel.
The US and the eurozone will have to pass two different political tests. The US must demonstrate that it can maintain an accommodative fiscal policy without putting too much pressure on yields. “On the other hand, the eurozone must prove that it can undertake joint monetary and fiscal tightening without damaging growth or political stability too much and without increasing financial fragmentation,” he concludes.
“We are facing a new regime of greater volatility, both macro and market, which highlights the need to apply an active approach to portfolio management,” says Javier García Díaz, head of the Iberian Peninsula at BlackRock. Next year, it will be essential to be dynamic and, adds the professional, to have “the necessary management skills to overcome the formulas that worked during the Great Moderation”. According to the professional, investors will have to face a “very challenging scenario”, with high geopolitical tension and the expectation that the main central banks will start cutting interest rates, “a movement in which we expect the Fed to take the lead from the second half of the year”, says Javier García Díaz. These movements will be conditioned by the evolution of the cycle and inflation, which will stabilize in the long term at around 2%, taking into account the persistence of the forces that caused it, such as tensions in the labor market due to the aging of the population.
“Making predictions in a world driven by geopolitical factors is practically impossible, since these are unpredictable,” says Lale Akoner, senior economist at BNY Mellon IM. The main themes in the coming months will revolve around inflation, growth, labor market data from developed economies and how this will help with asset allocation.
According to the professional, the starting point in Europe is worse than the United States, the region is more sensitive to high interest rates and inflation remains higher. It is also more exposed to the volatility of energy prices and, with the current geopolitical situation, it is necessary to be alert to any escalation of the conflict in the Middle East and its possible effect on oil prices.
“Overall, it is a good context for alpha strategies and asset managers should start to show their potential again,” she adds. At BNY Mellon IM, they also believe that strategies that help protect capital, diversify and de-correlated portfolios will be more useful in a context of greater structural volatility.
As Rob Lind, chief economist at Capital Group, points out, inflation has been a persistent source of concern for investors in recent months, particularly due to its impact on interest rates. In the short term, he believes it is likely that inflation will continue to decline and that rates will have peaked.
“This will mainly reflect the impact of falling energy prices and the slowdown in economic growth,” he says. He therefore expects a soft landing in the US in 2024, following robust growth in 2023. The European economy, in turn, is expected to record a modest recovery in 2024, after having stagnated in 2023.
In the medium term, however, he expects inflation to be higher and more volatile for reasons such as continued higher wage pressure and looser fiscal policy, especially in the US, which is generating budget deficits of around 6-7%.
In addition, he believes that new geopolitical tensions and disruptions to trade and global supply chains are likely to emerge, which could also increase inflationary pressures. “I believe that these factors will make it much more difficult to achieve the current inflation targets of central banks,” says the professional.
“In the first half of 2024, the global economy should be able to withstand the impact of real rates thanks to the restocking of the manufacturing sector, the tightening of labour markets, the falling Chinese risk premium and excess liquidity,” explains Kevin Thozet, portfolio consultant and member of the Investment Committee at Carmignac.
However, these buffers will weaken in the second half of the year, as the effects of monetary tightening peak and central banks begin to cut rates in a timid manner. In the case of government bonds, the tug-of-war between high policy rates and the restoration of the price discovery mechanism means that the selection of suitable maturities and regions will be as important as market guidance.
The soft landing environment of the first half of the year means that credit markets will maintain their leading position in terms of risk-adjusted returns. “The second half of the year is likely to see macroeconomic headwinds emerge, making bond selection more crucial,” he adds. After a runaway from the Magnificent 7, the drivers of equity returns will increase. “These concentrated returns require some caution; it makes sense to apply a barbell approach; to diversify from favourite names”, concludes Kevin Thozet.
The economic data recorded in 2023 were more positive than one might have expected at the start of the year. Inflation has fallen from its highs, employment figures have remained resilient and we have not reached the recession scenario that some predicted.
“In the same vein, we believe that we will not face the problem of a recession in 2024 either and that, if we do, it will be shallow. What we expect for next year is that inflation will continue to fall, as in recent months, and that interest rates will remain high for longer. As for unemployment, we believe we will see falls”, says Rubén García Paez, head of Columbia Threadneedle for the Iberian Peninsula and Latin America.
However, economic risks will not have the greatest impact. On the contrary, they will be replaced in 2024 by risks arising from the tense global geopolitical situation, with conflicts such as those in the Middle East, the war in Ukraine or tensions between the United States and China, for example.
These events cause concerns, volatility in the short term and inflationary pressures in the long term. “It is these types of risks that we should pay closer attention to next year, due to their impact on companies, the great uncertainty they generate and what this insecurity causes in the markets”, he concludes.
“We expect a slowdown in global economic growth in the first half of the year, which should be followed by a slight recovery during the second half,” says Mariano Arenillas, head of DWS for the Iberian Peninsula. For the US and Europe, this means annual growth of almost 1%, and for China, less than 5%.
They predict that inflation rates on both sides of the Atlantic will fall below 3% by the end of 2024. This means they are at least close to the central banks’ comfort zone, which will likely allow them to lower interest rates. They expect three interest rate drops, both in the US and the eurozone, starting in the second half of the year. Consequently, “we believe we have already seen the peak in bond yields,” he adds.
From the perspective of stock investors, the combination of slow economic growth and generally high interest rates is less advantageous. But after years of stagnation, at DWS they expect companies to return to recording, on average, single-digit earnings growth, and we see positive price potential in the equity markets.
For 2024, Fidelity predicts a high probability that the economy will enter a cyclical recession this year. “The savings accumulated by families and the business sector during the pandemic are practically exhausted, public spending is expected to decrease and it is likely that there will be an increase in refinancing needs at a time of widespread tightening of credit granting”, explains Sebastián Velasco, director -general of Fidelity for Spain and Portugal.
In this sense, inflation has already started to fall, but interest rates will remain high for longer until clear signs of a return to the objective appear. Then central banks will change and cut rates as the hit to economic growth becomes evident. Thus, labor markets must normalize and price stability must restore before moving towards a recovery in late 2024.
Overall, Invesco expects the slowdown in global growth to continue in the first half of 2024, albeit with nuances: the United States would be the most resilient economy, the eurozone would record steady growth, and Chinese growth would stabilize after several periods of deceleration.
In the opinion of Invesco’s director for the Iberian Peninsula, Latin America, US Offshore and Israel, Íñigo Escudero, inflation will maintain its downward trend throughout the year, which should lead to a softening of monetary policy, especially in Europe and the United States, which may start the new cycle of cuts at the end of the first half of the year due to disinflation and the economic slowdown.
“If our expectations are met, the second half of the year will see an economic recovery – driven by inflation and monetary policy – that will increase investors’ appetite for risk, which could benefit assets such as equities,” he says.
“The world is changing and, with it, financial markets,” says Ali Dibadj, CEO of Janus Henderson. The new scenario will be very different and this transition will present challenges and opportunities for investors. In his opinion, in 2024, we must be aware of the structural changes that will alter the investment landscape in the next decade and evaluate the positioning of portfolios taking into account three unstoppable growth factors:
- Geopolitical readjustment. Geopolitics affects all asset classes and investors will need to think holistically to position themselves and navigate the knock-on effects of cross-border disputes, relocation and supply chain adjustments.
- Demographics. Changes are occurring globally and in the way people live. When investing in these market segments, it will be essential to differentiate between hyped trends with questionable viability and innovative business models and technologies that can generate pricing power, barriers to entry and competitive advantages with real long-term profitability potential.
- Finally, the return of the cost of capital. The return of higher rates has radically changed the corporate landscape. The cost of capital is likely to remain higher than in recent history, but rates are likely at their highest and may start to decline. This will reduce the attractiveness of holding liquidity and there is likely to be a shift towards the potential for profitability in risk assets.
These growth drivers will create a better environment for stock selection, differentiated analysis and a selective approach to asset allocation, predicts Ali Dibadj. “An environment that requires investing in the right asset class and the right securities, operating in the right context. The key will be to build portfolios for a world in transition,” he says.
Jupiter AM’s main thesis continues to be that major developed market economies will experience a significant slowdown and, most likely, a recession, and that some emerging market economies also appear fragile.
“When we look at the current state of global economies, we believe that a slowdown at this stage may be even more likely,” says Ariel Bezalel, head of Fixed Income and Strategy. There are at least three key factors supporting this thesis, especially in the US:
- Long and variable monetary policy lags.
- The contraction in lending activity and the tightening of lending criteria.
- Less support for consumption
History has always shown that monetary policy takes time to affect economies. “We don’t see any structural change that would make things different this time,” adds the professional.
In both the US and the eurozone, banks have been tightening lending standards and have begun to reduce lending activity. The US savings glut has dried up for 80% of households, and the savings glut has declined for 23 months in a row.
Outside the US, the environment looks even more fragile. Increased reliance on manufacturing has already pushed the eurozone into what is effectively a moderate recession. Similar trends are also emerging in the UK, where mortgage revaluation remains a key risk. Finally, they continue to believe that China will continue to disappoint, as it struggles with many structural issues in the coming years.
“These developments will give central banks around the world reasons (or perhaps the need) to be less aggressive,” he concludes.
According to Javier Dorado, managing director for Portugal and Spain at J.P. Morgan AM, 2023 has started with the fastest pace of rate hikes in the last ten years; At the end of the first quarter, we saw weeks of volatility due to banking stress, but 2023 is ending with the US economy proving to be more resilient than many expected.
As the fiscal stimulus and surprising consumer activity begin to fade, growth is likely to moderate. But it is not yet clear whether the cycle, once slowed, could be prolonged or whether the most anticipated recession in history will finally materialize.
“Our baseline scenario foresees continued moderation in inflation and growth, but also recognizes the underlying resilience of the US economy,” says the professional. Cooling inflation, combined with slower but positive growth, will likely keep rates on hold for some time. “Current yield levels support a modest overweight in duration. With the risks of an imminent recession receding, we find value in credit and remain neutral in equities (we prefer developed markets over emerging markets),” he concludes.
“The most likely scenario we see for the United States is a soft landing, in line with the Federal Reserve’s ambitions since the beginning of its monetary tightening cycle,” says Laurent Gorgemans, global head of Investment Management at Nordea AM. However, an unexpected increase in consumer price data or more persistent core inflation, driven by further increases in real wages, could change this scenario. “Market participants are already discounting the Fed’s first rate cut in 2024, which may be premature,” he adds.
The eurozone appears to be in a different context. Germany is struggling more than expected, with a recessionary path that appears more structural than technical, despite EU GDP growth expected to remain positive. “The effects of monetary tightening are becoming more visible: demand for corporate loans is falling, while weaknesses in manufacturing and retail sales persist. For this reason, according to the expert, Europe could face a more abrupt landing, given the greater fragility of most European economies,” says Laurent Gorgemans.
As for China, the reopening story has not triggered a return to high growth, given the ongoing housing market problem, weak domestic demand indicators and geopolitical forces. “This leads us to believe that China’s growth could remain weak,” he concludes.
Robeco’s outlook for 2024 foresees a significant change in the global economic outlook. The Goldilocks scenario is coming to an end. “The decline in consumer spending and reduced business investment are likely a reflection of the deep slowdown in the G7 economic cycle,” says Peter van der Welle, multi-asset investment strategist at Robeco.
Persistent high rates could lead to unemployment rising to 1-2% by 2025. Corporate and household balance sheets remain strong, which has so far prevented a classic recession. China, on the other hand, faces a risk of outright deflation. A continued downward trend in Chinese sales and house prices could hamper a sustained recovery in domestic consumption.
According to the professional, in 2024, financial markets will see a tightening of financial conditions. “Bond yields may not have peaked, which will initially affect their use as a hedge. Rate curves may steepen further due to fiscal concerns, although correlations between bonds and stocks are likely to turn negative when underlying inflation falls below 3%,” he adds.
Stocks face challenges such as reduced liquidity, geopolitical issues and high interest rates. Current double-digit earnings growth forecasts, according to the consensus, seem more optimistic, which could lead to a compression of multiples. “Although the consensus on earnings forecasts carries risks, Europe and Japan may fare better. In the currency market, the Fed is approaching the tapering phase of the cycle. The dollar-yen pair is interesting given the yen’s upward potential,” he concludes.
“Growth will slow as the rate hikes feed through to activity,” says Leonardo Fernández, head of the Schroders Intermediate Channel. However, a full-blown recession remains unlikely and the global economy is expected to stagnate largely in 2024. “Monetary policy in developed countries is probably at its tightest, but economic conditions will determine rate policies,” he adds.
For example, the case for keeping rates high in Europe is not clear-cut and the ECB could implement a first cut in the first part of 2024. The Fed, for its part, is unlikely to start cutting rates until the second half of 2024, due to the risk of another wave of inflation in the US. In this context, we must add the megatrends of decarbonisation, demographics and deglobalisation – the 3Ds – which will continue to have “a seismic impact on economic prospects and investors’ investment approach in 2024”, he concludes.
UBS AM expects economic activity to prepare for a mild cooling. “Estimates for 12-month earnings per share continue to rise, although we expect the pace of improvement to slow as economic activity moderates”, says Álvaro Cabeza, head of UBS AM’s business for the Iberian region.
On the other hand, the slowdown in growth will help to consolidate the view that the Federal Reserve’s tightening cycle is probably over. If this outlook is confirmed, it is likely that confidence will be renewed that the economy will have a soft landing, rather than a rapid shift from overheating to recession.
The manager also says that the Fed’s recent rhetoric suggests that the bar for further tightening of monetary policy is even higher. “The speech also suggests greater tolerance for solid growth, as long as it does not encourage a reacceleration of inflation,” adds the professional.
Published on FundsPeople on December 15th, 2023
