Multi-Asset Outlook 2024: Assessing Risks and Opportunities in a Growth Slowdown

No longer do we oscillate between risk-on (favouring equities) and risk-off (favouring nominal bonds) phases in response to macroeconomic dynamics. This shift away from the ‘risk-on, risk-off’ environment occurred as stock-bond correlations turned positive, largely in response to the surge in inflation and the subsequent actions of central banks. The financial landscape has since evolved from the inflationary surge post-COVID to a more subdued climate, with inflation trends inching towards normalcy. This transformation in the economic landscape necessitates a fresh analysis. Let’s have a closer look at the current financial trends and potential future outlooks.

Our analysis suggests a promising trajectory towards the central banks' 2% inflation target in developed markets by 2024. This is largely underpinned by a favourable shift in energy prices and the cooling of the shelter component in the US CPI figures. Barring unforeseen spikes in oil prices due to geopolitical factors, this normalisation process appears to be on a steady path.

The economic growth outlook is somewhat more nuanced. The resilience of the global economy in 2023 came as a pleasant surprise, bolstered by governmental fiscal aids, enduring consumer spending, and strong order books—a hangover effect from the supply chain disruptions post-lockdowns. Yet, as we look towards 2024, the leading indicators signal a gentle deceleration in economic momentum. The exceptional savings buffer accumulated during 2020 and 2021 is waning, and heightened financing costs are beginning to dampen corporate investment. However, with the labour markets holding firm, a dramatic downturn seems unlikely.

Central banks have had their hands full, executing one of the most aggressive interest rate hiking campaigns in recent memory. But with inflation expectations remaining well-anchored and growth easing, they now face the possibility of shifting gears towards rate cuts.

In this context, let's consider the implications for multi-asset opportunities:

The fixed income domain has become particularly appealing. Government bonds, for instance, present an attractive risk-return proposition. The rapid and sharp correction we observed in 2022 has carved out significant value. While roll-down returns are limited due to relatively flat yield curves, the absolute yields are enticing—especially when we recall the negative yields not so long ago. We're now looking at a skewed return scenario with limited downside risk and the prospect of double-digit returns should rates decline further.

Turning to corporate bonds, the investment-grade segment offers a healthy spread over the risk-free rate, and we're seeing companies with robust financials—evidenced by record-high margins, strong balance sheets and sound debt maturity profiles.

High-yield bonds are also worthy of attention. Current spread levels are beginning to reflect realistic recovery rates, and should they expand with the economic slowdown, they could offer very lucrative entry points.

In the equity sphere, the markets have already priced in some degree of economic slowdown, more so in Europe and among global small-caps. The inventory correction post-supply chain crisis appears to be well advanced, and we're starting to see a cautious optimism in sentiment indicators. However, as we venture into the new year, earnings per share (EPS) growth expectations, particularly in the US, may require recalibration.

The present economic phase favours high-quality growth and defensive stocks, with opportunities ripe in sectors aligned with secular growth trajectories—artificial intelligence, green technology, and new medical treatments like GLP1s. The key here is selectivity, as not all stocks will weather the forecasted conditions equally.

Real estate is on the cusp of a renaissance. Currently undervalued, we anticipate a narrowing of this discount as interest rate volatility subsides. Small-caps also present compelling valuations, though the timing for investment will be critical, contingent on economic green shoots or a turn in manufacturing PMIs.

Within commodities, copper and silver could notably benefit from the global pursuit of achieving net-zero carbon emissions, given the high demand in green technologies. As economic activities recover, the demand for these metals could surge. Similarly, if the German industry manages to rebound, natural gas prices might also experience an uptick. Recently, uranium prices have been on the rise, signalling the growing popularity of nuclear energy in emerging markets.

Our multi-asset expertise relies on a proprietary model to anticipate future stock-bond correlations, considering inflation regimes, output gaps, and monetary policy regimes. Although we're still navigating a high-inflation regime, the current trends suggest a gradual shift towards a medium inflation regime, which could herald the return of negative correlations—a boon for portfolio diversification.

In short, the investment environment of 2024, while intricate, presents a canvas of opportunities for the astute investor. The expected resurgence of the 60/40 portfolio indicates a balanced approach to risk and return, aligning with our forecasted economic shifts. This multifaceted, financial environment presents a series of challenges yet offers distinct opportunities for well-informed investors. An active, adaptable investment approach can help investors navigate through the changing correlations, attractive yield levels, and new market trends that currently characterise the global financial landscape.

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