2024 Global Market Outlook : a fine balance

For investors, the year ahead will be a fine balance between chasing potential equity market gains and protecting capital should the soft-landing fail to materialise. Geopolitics, ‘the election year’, artificial intelligence and growing fiscal concerns mean volatility is a given. However, volatility provides opportunity, and in 2024 we expect tactical positioning to play an increasingly important role across portfolios. You can read our full report here.

vid-01

Our view

When considering the outlook for the year ahead, we typically start by reflecting on the 12 months prior – an important step in assessing the foundation for the period to come.

2023 was a year when most equity markets registered impressive gains and fixed income markets staggered through significant volatility to provide investors with solid returns. In fact, the past year might be best described as an ‘everything rally’ – one in which nearly every asset class registered positive gains. Remarkable, given the banking crises, twin wars, and further central bank tightening.

Where a backdrop of higher rates typically leads to recession and a collapse in asset prices, so far, economies and markets have shrugged these off thanks to fiscal expansion that has supported households and corporates. Moreover, the onset of the first major credit event since the pandemic – the US banking crisis – was met with a liquidity bailout from the US Federal Reserve (Fed) and a government guarantee, arresting any lasting market fallout.

Indeed, where markets have previously been beholden to monetary policy moves, we may soon enter a period of increasing fiscal dominance.

The stark difference in outcomes following US Treasury refunding decisions over the latter half of the year shows the power that non-conventional policy measures can yield. Treasury’s decision to increase long-term debt issuance in August – for the first time in three years – saw bond yields jump and equities tumble. The subsequent reversal of this decision in November, alongside an increase in short-term issuance, and the market’s perceived ‘Powell pivot’ led to a complete unwind of the moves through year-end. In an US election year, we expect to see further evidence of this as the government seeks to avoid recession at all costs.

A tale of two financial market outcomes

info-01

Source: Strategas, ANZ CIO as at 2 January 2024. Past performance is not indicative of future performance.

Additionally, as we enter an expected period of structurally higher inflation, the nature of monetary policy may also change – being deployed less in response to growth imbalances and rather in response to managing inflation through the cycle. Here, rising rates are less likely to be reflective of a growing economy but rather a vulnerable inflationary environment. If this occurs, the negative correlation between bonds and equities that investors have become accustomed to over the past 20 years may turn positive on a more frequent basis.

Despite a potential first wave of fiscal dominance, in 2024, we expect the path for inflation and the reaction function of the Fed to be the primary focal point for markets. For the Fed, avoiding a potential inflation resurgence as seen during the 1970s is likely to be front of mind.

Unlike recent years, where the challenge for central banks has been correctly calibrating monetary tightening, in 2024, the timing and depth of rate cuts will be critical – too early, there’s a risk that inflation reaccelerates; too late, and any downturn may be deeper than necessary.

Comparing inflation eras

info-02

Source: BLS, Macrobond, ANZ CIO as at 9 January 2024

The market is currently pricing for Fed rate cuts from March. With inflation remaining above target and the jobs market strong, we believe this timing remains premature. Furthermore, equity markets have typically topped out ahead of an easing cycle. If equities remain well supported, yields retrace further, and credit spreads continue tightening, then financial conditions will improve – boosting sentiment and possibly economic activity. Rate cuts at this time would risk reigniting inflation pressures.

Rather, we look to Q3 as a potential starting point for the Fed to commence easing.  We expect rate cuts to materialise in Europe from Q2, and Australia over the latter part of the year.

In our view, an earlier and more aggressive easing cycle would be reflective of a harder landing, where growth capitulates rapidly, the Fed is forced to intervene, and markets suffer. A shallow easing cycle, commencing over the latter half of the year, seems more consistent with a soft landing and an outcome that might be more supportive for markets.

Even so, growth is expected to weaken over the course of 2024. In the US, while GDP growth is expected to be 1.1 per cent, a period of mild contraction or worse cannot be ruled out. Growth in Australia and Japan is slated to be 1.2 per cent. For the euro area, expectations are for a more modest 0.4 per cent increase. While in China, where growth remains robust relative to developed markets, GDP growth is forecast to ease to 4.2 per cent.

While a soft-landing is plausible and could be supportive for markets in the year ahead, risks remain.

Growth is expected to weaken over 2024

info-03

Source: ANZ Research, ANZ CIO as at 19 December 2023

In this year’s Global Market Outlook, we highlight four key topics we are watching in 2024 and how we are approaching these from an investment perspective – the US consumer, rising credit risks, geopolitics amidst the election year, and the compelling opportunities across fixed income markets. Alongside further advancements in AI, including a more rapid commercialisation of its potential, these are just some of the headlines we expect to drive market direction in the year ahead.

In 2024, more than half of humanity will reside in countries holding a nationwide election. We expect geopolitics to again figure prominently and be a continued source of volatility for markets, an ongoing threat to supply-chains and an inflation risk. Not least, as America gears up for its presidential election and countries seek to test its resolve as the world superpower. Indeed, as we touched on in our Client Insight sessions last year, 2024 may prove to be a microcosm of the challenges investors face in the decade ahead – as changing demographics, rising populism, and a shift to a multipolar world provide a more volatile backdrop for markets.

Geopolitical risks are rising

info-04

Source: Economic Policy Uncertainty, Macrobond, ANZ CIO

This year, the strength of the US consumer, who has ably supported corporate profits in recent years is likely to weaken. Alongside benign global growth, analyst expectations for double-digit EPS growth currently appear stretched.

And while central banks and governments have shown a willingness to intervene if financial conditions deteriorate rapidly, we cannot rule out a market dislocation should they fail to act in an appropriate timeframe.

In 2024, we see scope for equities to rise further. However, even if a soft landing can be delivered, given the magnitude of challenges facing markets, a lot will need to go right for this to occur. Following the strong gains over 2023, we believe this probability remains low relative to the potential upside in risk assets. Irrespective, market performance across regions and sectors is likely to be uneven throughout.

So, perhaps more so than previously, we believe tactical positioning should play an increasingly important role in managing client portfolios.

One key aspect may be where and when to position for any global easing cycle – emerging markets, cyclicals, real estate, small caps, and the value sector could be among the beneficiaries. While we see the potential for mid-single digit upside across equity markets, there remains the possibility of greater downside too.

Balancing this possibility of equity gains against the potential for risk-adjusted returns from fixed income informs our positioning as we start the year.

Across portfolios we hold a preference for high quality fixed income assets, including Australian and global sovereign bonds, and investment grade credit.  While we don’t forecast a sharp fall in yields over 2024, as the starting point for rate cuts becomes clearer, we believe the US yield curve is likely to bull steepen. Alongside the current yield embedded in these assets, bonds should provide an opportunity to deliver solid risk-adjusted returns to portfolios.

Conversely, we start the year with an underweight to high-yield credit. Here, spreads remain tight and inconsistent with the prevailing recession risks.

If the economic downturn becomes more severe and central banks are forced to cut rates more aggressively, high-quality fixed income may offer outsized returns to equities and solid diversification to portfolios.

Across equities, we are modestly underweight overall, with a current preference for developed markets – in particular European shares. In Europe, valuations are attractive, profit growth is likely to match the US, and an easing cycle should commence earlier.

In 2024, this theme of investing in previously underperforming and cheaper segments of the market is likely to be a feature of portfolios – providing the opportunity to participate in rallies while potentially limiting the downside in the event of a broader market pullback. Although we currently hold a modest underweight to Australian and emerging market equities, given recent underperformance and relatively cheap valuations, we look for opportunities to increase our positioning over the year. 

Performance differentials are expected to feature again in 2024

info-05

Source: Bloomberg, ANZ CIO as at 31 December 2023. Past performance is not indicative of future performance.

Of course, valuations and past performance will not dictate positioning entirely. In the US, the ‘Magnificent Seven’ are expected to drive EPS growth. If a broader market pullback eventuates, we may use this as an opportunity to increase exposure to higher beta segments such as this.

For investors, 2024 appears delicately poised. A soft landing may allow equities to continue climbing; a misstep from the Fed could prove otherwise.

As always, we continue to advocate for a long-term diversified investment strategy.  And while we commence the year positioned defensively overall, we will seek to actively exploit opportunities across risk assets as we navigate what is likely to be another volatile year for markets.

You can read more in our 2024 Global Market Outlook publication. If you’d like to understand how ANZ Private might be able to help with your investment needs, please speak to your ANZ banker or advisor.