A fragmented world: 2024 market outlook survey

3 top concerns: geopolitics, central bank policies and inflation

In the survey results of 2023, the top concern among most investors revolved around central bank policy missteps. This worry stemmed from the persistently high inflation, prompting everyone to closely monitor the actions of central banks as they navigated the interest rate hikes to battle inflation. Many were hoping for a “soft landing” at that time but also acknowledging the immense challenges associated with raising interest rates just enough to stop an economy from overheating without causing a severe downturn.

Fast forward to 2024. With inflation (somewhat) under control and the US economy still showing signs of resilience, investors have redirected their attention to other lurking issues. Foremost on the minds of most respondents in the survey is the prevailing geopolitical risk. However, central bank policy missteps, inflation and recession are not too far behind.

Elections–and the outcomes of them–could be one contributing factor to the worries around geopolitical risks.

According to Lazard, over 50% of the world’s population would be participating in elections this year. One of the most watched would be the presidential elections in the US in November. The US has been grappling more and more with internal political strife in recent years and parties on both ends of the political spectrum have become more extreme and there is less likelihood that a moderation of views would form.

Tensions between the US and China is also another topic that is being closely monitored, given its significant impact on the economies of both countries and the potential ripple effects that may spill into neighbouring countries.

In addition, the Russia-Ukraine war and the Israel-Hamas conflict persist without a clear resolution in sight. The continuation of these conflicts raises concerns about regional stability.

US: recession and rate cuts

Almost half (46%) of the respondents expressed confidence that the US will be able to avoid a recession entirely. However, around one-third of the respondents believed that a recession would likely take place in either the second or third quarter of 2024.

The follow-up question to the one on the US economic recession is the timing of the first rate cut. More than half indicated that they expected the first rate cut to come in the second half of the year and likely in the third quarter. As we approach March without any hints of a decline in interest rates, it seems possible that these respondents may have been correct in their forecasts.

Great expectations: US, China and global growth

With the exception of the US, GDP growth expectations are largely in line with the estimates and forecasts from the year before. In general, fund managers are much more optimistic about the US. The average forecast is now 1.6% GDP growth with a range of 0.7%-3.5%. Our fund managers may be more pessimistic with regards to US growth as this estimate is lower than the IMF projection of 2.1% for 2024.

Last year, the overhang of high inflation, coupled with the Fed’s rapid rate hikes dampened the outlook for the US. The US economy, however, defied expectations and pulled off a robust GDP growth of 2.5% in 2023 overall. This is higher than the widely used long-term projected GDP growth rate of 2.0% for the US.

This year, the outlook for the US economy is more optimistic, helped by falling (and stabilising) inflation, continued consumer spending, and a resilient labour market. While the upcoming elections this year adds to an uncertain political climate, there are long-term factors working in the favour of the US, namely, the US dollar as the world’s reserve currency, robust and deep capital markets, a flexible workforce and a relatively young population compared to other developed markets.

On the other hand, the forecasted GDP growth rate for China remains in line with previous estimates. The average 4.6% forecasted GDP growth rate for China is also in alignment with the IMF’s estimate for China’s growth in 2024.  This comes amidst continuing challenges from the property sector downturn, high youth unemployment, decline in consumer confidence and deflation pressures.

Expectations for global growth rose slightly to about 2.6%, up from 2.4% Again, similar to the US, this falls short of the IMF’s projected growth rate of 3.1. This year, the fund managers are more cautious in their outlook for global growth.

Equities and fixed income on an even keel

Fixed income and equities emerge as the two most preferred asset classes in 2024, with fund managers being divided in terms of their views between these two asset classes. Cash and money market funds also receive substantial support, likely due to the high interest rate environment. Alternative investments such as private credit, real estate & infrastructure, hedge funds, commodities, private equity, and gold show varied levels of interest, suggesting a trend towards diversification and the relevance of non-correlated returns within portfolios.

The diverse preference for asset classes and the absence of a clear winner in this particular survey question indicate how difficult it is to pinpoint “the best investment opportunities” each year, and the landscape in 2024 is no exception. The unpredictability of global markets, influenced by geopolitical tensions, economic shifts, and unforeseen events, such as natural disasters or pandemics, makes it exceptionally difficult to accurately forecast where the best investment opportunities will arise. Moreover, the rapid pace of technological  advancement, and changing consumer behaviours compounded by further regulatory changes can swiftly alter the attractiveness of certain investments.

Fixed income: new regime?

The high interest rate environment had prompted a number of investors to adopt a cautious approach by holding cash and staying on the sidelines. For those with a slightly longer time horizon who wish to capitalise on  a potential shift in the monetary policy regime, investing in longer duration and higher yielding bonds could be an option. Within this, which sub-asset class is the most attractive?

More than a third of the fund managers picked investment grade bonds as the sub-asset class with the most opportunities. Emerging market bonds closely followed, with about 28% of the managers picking this asset class. Although high yield bonds were the least popular, they still received almost a fifth of the votes.

Investment grade corporate bonds, have historically generated positive returns during previous Fed rate hike cycles and could perform well in an environment with falling interest inflations, slowing growth and interest rate cuts.

More than two-thirds of the survey respondents chose long duration for fixed income positioning. This comes as the markets and industry participants anticipate rate cuts this year even as central banks maintain a relatively hawkish stance. When interest rates fall, bonds with longer duration (higher sensitivity to interest rates) are more likely to see an increase in prices

Equities: US back in favour

In last year’s survey, when asked the same question, the favourite equity market for 2023 among respondents was emerging markets, followed closely by China. US equities were a distant fourth.

This year’s results marked a significant shift from the sentiments expressed from merely a year ago, as US equities emerged as the clear favourite among investors, followed by developed markets as a whole.

In contrast, China equities had a difficult year in 2023, confronted by a slew of issues including the turmoil in the property sector, a decline in business and consumer sentiment and finally, leading into local government financing issues. These factors combined have seemingly hindered the restoration of investor confidence in China.

Digging a little deeper into the equity space, it was perhaps not surprising to see that an overwhelming majority of fund managers are betting on quality stocks to outperform relative to other styles and factors this year.

Quality companies are typically ones with consistent earnings and robust financial statements. These characteristics could help companies navigate the challenges such as stringent monetary policies, escalating debt levels, and declining consumer spending. These companies are likely to also provide some downside protection in an uncertain investment environment.

Artificial intelligence as a theme also garnered the most support from fund managers as the theme most likely to do well this year. Again, not a surprising outcome, considering how well stocks like Nvidia did last year and in the year-to-date period.

Alternative investments: for diversification

In an uncertain investment climate, marked by interest rate cuts and slowing economic growth, alternative investments such as private markets and hedge funds become particularly attractive as they offer significant diversification benefits. They generally display less correlation with traditional stock and bond markets, providing a buffer against market volatility.

The diverged views expressed by surveyed fund managers make it challenging to draw a consensus on where the best opportunities lie. With the potential for higher returns, alternative investments appeal to those seeking to enhance their portfolio's performance, especially when traditional markets show limited growth prospects. Moreover, private markets can grant investors access to innovative companies in emerging sectors, presenting growth opportunities that are not available in public markets. Hedge funds, employing sophisticated risk management strategies, may protect portfolios from downside risks, leveraging market inefficiencies to generate returns even in a challenging economic environment.

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