Monthly house view | December 2023

Global economy

Leading economic indicators point to a mild recession in the US and stagnation in Europe in the early part of 2023, followed by a rebound in the second half of the year. Our central forecast is for global GDP growth to decline from 3.0% in 2023 to 2.8%. The bulk of this growth should come from emerging markets.

Central banks

Our central scenario is for the Fed to start cutting rates by June, with a total of 125 bps in cuts bringing the fed funds rate down to 4-4.25% by end-2024. We also think the ECB will start rate cutting in June, but it could move earlier should downside economic risks accumulate. We expect 100 bps of rate cuts to reduce the ECB’s deposit rate to 3% at end-2024. We expect both central banks to continue with a prudent approach to quantitative easing. We believe the Bank of Japan will move equally cautiously towards finally ending yield curve control and negative interest rates next year.

Major economies

We believe the rapid pace of rate hikes since early 2022 will catch up with the US economy in 2024, with a mild recession in the first hald and growth in annual GDP falling to 0.8% in 2024 from an estimated 2.4% in 2023. Price rises will continue to decelerate, but consumer inflation will remain above the Fed’s target. We believe GDP growth in the euro area will increase slightly in 2024 to 0.6% from 0.5% in 2023, thanks to a mild recovery in H2. We see headline consumer inflation in the euro area averaging 2.4%, well down from 5.5% in 2023. Our central scenario is for zero GDP growth in the UK in 2024 (down from 0.5% this year), while we see GDP growth in Switzerland slipping from 1.2% to 0.9% next year. In Asia, we continue to see a moderate recovery in China, but our central forecast is for GDP growth to decline from an expected 5.2% in 2023 to 4.7% in 2024. We also see growth in Japan decelerating from 1.8% to 1.1%. Indian growth may also slow, but remain healthy. An upturn inthe semiconductor cycle could spur growth in South Korea next year.

Asset classes   

Equities Our forecasts for nominal GDP lead us to expect mid-single digit revenue growth for developed-market equities in 2024. Equity valuations will continue to be an issue in the US, with a chance that mild multiple compression wights on US equity returns. Valuations in Europe and Japan could remain around their current level. We expect the bulk of total returns from equities to come from dividends and share buybacks in 2024, with greater potential outside the US. Overall, we are now broadly neutral on developed-market equities but still cautious on US equities. Sector wise, we continue to like energy and health care stocks on both sides of the Atlantic. US consumer staples may also be a sweet spot, while fundamentals remain strong for some Big Tech names. We believe a weak global backdrop could test emerging-market equities in the first half of the year, although their attractiveness should increase as US bond yields and the US dollar retreat. Our preference goes to Asia, notably equities in South Korea and India.

Fixed income We see the 10-year US Treasury bond yield falling towards 4% in the first half of 2024 given the chance of a mild recession in the US. We expect the 10-year yield to recover to 4.3% thereafter, with Treasury supply and the US fiscal deficit also exerting upward pressure. We see 10-year Bunds declining to 2% in H1 2024 before rebounding to 2.3% by the end of next year. Given the expected decline in interest rates, we have moved to an overweight position on core European government bonds and remain overweight US Treasuries. We have likewise moved to an overweight position in euro investment-grade bonds to lock in attractive yields and we have been extending duration exposure. By contrast, we continue to consider that investors are not being adequately compensated for the level of risk in noninvestment-grade bonds. We also see emerging-market bonds as an attractive source of carry and diversification.

Currencies, commodities, alternatives We would expect US dollar strength to fade as the US economy weakens early in the year and Fed rate cuts loom. While the ability of economies to withstand previous rate increases will differentiate which currencies perform best, we could see cyclical currencies starting to outperform in H2 as global conditions improve. We expect increased supply from non-OPEC+ countries and sluggish demand (at least in developed markets) progressively impacting the price of Brent oil, which could ease towards USD80 per barrel by end-2024. In alternatives, we continue to favour multi-manager strategies in hedge funds and private equity while we believe that thematic private equity strategies still have some way to go. Direct lending and distressed debt are also areas worth exploring.

2024 investment themes

With a lot of important electoral contests in 2024, not least in the US, we believe fiscal and debt issues will rise in prominence, contributing to market volatility. We believe there will be ways to play this volatility through options and currencies. At the same time, we see core government bonds remaining relatively attractive as central banks move to cut rates. Indeed, we believe now is the right time to move from cash and cash-like instruments to fixed income in order to lock in current yields. In ‘safe-haven’ government bonds, our preference goes to maturities of up 10 years, while in investment-grade corporate bonds it goes to maturities of up to seven years in Europe and five years in the US. We continue to believe in the potential of private assets, with private credit a particular focus of interest in 2024.We will continue to prefer countries and companies where fixed-rate lending is prevalent over those exposed to variable rates. A close analysis of corporate debt structures will be an important part of our active management approach in 2024. As part of that approach, we will continue to focus on companies linked to long-term structural growth drives such as decarbonisation and digitalisation. Many of these are to be found in the industrial sector. We will also look for companies that have plenty of free cash flow for dividends and share buybacks and that are robust enough to pay down their debts. Finally, we believe that generative AI will continue to bound ahead, leading to palpable early advances in sectors such as healthcare, for example.