Thankfully, the global recession everyone expected in 2023 never really materialized, except for some parts of the world where we see a mild and more technical recession (e.g. European Monetary Union). Looking into 2024, we expect that the U.S. economy is likely to slow down, but should avoid a recession. Growth should resume in the second half of the year. In the absence of a painful economic downturn, your investment portfolio will benefit.
That said the reduced risk of a recession is just one element in a shifting financial landscape. As the economy has emerged from the Covid-19 pandemic, the most important development in the markets has been the historic increase in bond yields. As we look ahead to the upcoming year, it is important to recognize the impact of higher interest rates.
We believe that this environment has opened up pockets of opportunity for investors over the coming year. This will give you more flexibility to choose different types of investment vehicles that align with your specific goals.
We believe that the Fed and other central banks could start to cut interest rates sometime in the second half of 2024. If the rate cut comes in response to normalized inflation rather than a recession, the cutting cycle will likely be slower than what we saw during the early 2000s, with the financial crisis and the Covid-19 pandemic.
Some highlights:
- Following interest rate hikes by central banks around the world, global inflation has moderated from its peak. Although geopolitics and energy prices pose a risk, we believe that pressure on inflation will continue.
- Higher yields have also been a headwind to the broad global economy.
- Artificial intelligence may see a potential boost in productivity. Governments will incentivize areas like national security, energy transition, semiconductors, infrastructure and supply chains.
Stocks or bonds in 2024?
One big impact of higher interest rates is the competitiveness of bonds against stocks. When bonds offer such promising returns, you might be wondering if fixed-income investments deserve a larger share of your portfolio.
It is estimated that USD investment grade bonds could deliver around 5% p.a., with just a quarter of the volatility of large-cap stocks. In exchange for the added volatility, large-cap stocks should reward investors with returns of approx. 7% p.a. The best way for you to navigate this trade-off, depends on your personal situation and goals.
What about cash?
Although cash has a place in every investor’s plan and looks even more attractive today, it is expected that cash underperforms most other asset classes in 2024.
While there is nothing wrong with holding cash, it is important to consider whether cash has the right attributes to help you reach your goals.
What if inflation is here to stay?
Inflation around the globe has fallen from its highs of 8% – 10% in the summer of 2022. The expectation is that inflation will continue to decline towards the central banks’ targets of 2% p.a. A continued cool down in inflation will be good news, but there are still a few inflationary pressure points to keep an eye on. One aspect is that industrial policy and the transition to clean energy could support higher commodity prices.
The bottom line
Heading into 2024, we believe that you have more options for your portfolio than in the past years. We are able to take advantage of higher interest rates to reach your goals while taking on less risk than one would have expected just two years ago. The valuation of some stocks became closer to fair. Baltrag is still convinced that with a very well diversified portfolio, the investor is well prepared for the challenges ahead in 2024.
