Top of mind –
Investment Outlook 2024: Assessing the future trajectory of disinflation
The theme of the outlook we published last January was disinflation, and since then we have seen a significant decrease in inflation rates around the globe from the highs witnessed in 2022. The pivotal question now is: has disinflation reached its limits?
Questioning the trajectory
Inflation has wielded considerable influence over markets since 2021 and we anticipate its continued significance in 2024. This factor, among others, will play a crucial role in shaping our client portfolios - a point that does not seem fully factored into current market pricing.
Why pose this question now?
Many of the 'easy' disinflation victories have already been won, especially in the US and EU. The goal of the central banks - in developed markets at least - is to achieve sustained inflation below the 2% target without weakening their respective economies. This may prove challenging as monetary tightening can often lead to higher unemployment and softening growth data.
Potential paths and implications
With inflation in mind, we are contemplating three potential outcomes for financial markets in the coming year:
- Continued disinflation and resilient growth
The first scenario would see inflation levels continue to fall with growth remaining resilient. This would potentially allow central banks to ease pressure by cutting rates, stimulating their economies and creating a favourable backdrop for equities. This scenario is increasingly being factored into current market pricing, suggesting it is the most likely scenario at the time of writing.
- Recession-induced sharp decline in inflation
The second possibility would be that we fall into a recession which would result in a sharp fall in inflation rates. In this case, government bonds could rally significantly as central banks would aggressively cut rates to support the economy. Meanwhile equities could struggle under the weight of lower corporate earnings.
- Overlooking the second wave of inflation
The third, often overlooked scenario, would see inflation remaining above target and rising again, rather than continuing its downward trajectory. Tight labour markets and signs of a resurging global manufacturing sector could lead the global economy to overheat, causing renewed inflation concerns. In such an environment, anxiety over further central bank interest rate hikes may resurface, impacting both equity and bond markets negatively.
Navigating uncertainty with caution
While we refrain from making one-year forecasts, we pay close attention to evolving data which will provide us with useful clues about which scenario might unfold. It is worth noting that markets are anticipatory by nature, meaning that prices reflect what investors think will happen next as opposed to what has happened yesterday, and the impressive equity performance in late 2023 might face challenges in 2024. As we enter the New Year, we adopt a slightly cautious stance, acknowledging elevated equity valuations.
Positioning for the base case
Our base case is that we anticipate further improvements on the inflation front and we have positioned ourselves accordingly, with a preference for government and corporate bonds. However, we remain mindful of the market's complacent views toward inflation risks and stand ready to adjust our stance should evidence suggest a different trajectory in the New Year.
Opportunities in 2024
Despite the cautious tone, we believe there are numerous areas of value in the market. Like our approach in 2023, we continue to emphasise the importance of portfolio diversification to navigate potential economic paths and maintain agility and humility in adjusting our views – and positioning - as more evidence emerges.
Our commitment to diligence
This strategic approach has served us well over the last four years of economic and inflationary turbulence where we have performed well relative to our peers. We are committed to maintaining diligence in the year ahead, recognising the importance of continued robust performance for our clients who entrust us with their wealth.
Helping you go further in 2024
We would like to take this opportunity to thank you for your ongoing support and look forward to continuing our journey together.
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