By Mitesh Sheth
As the investment industry undergoes potentially existential change, Mitesh Sheth looks at the top five trends being eyed by equity investors in 2024
As we look towards the year ahead, the consensus view building is that markets are likely to remain buoyant for the short term but will face headwinds later in the year, driven in large part by the actions of the US Federal Reserve and employment data. More on this later.
We approach forecasting with humility, recognising that none of us can truly anticipate the key drivers of market returns on a 12-month basis. No-one could predict the Covid pandemic in 2020 or Russia’s invasion of Ukraine in 2022, or the artificial intelligence-driven rallies of 2023. Equally, our expectations of an economic hard landing, given higher-for-longer inflation and interest rates, have not played out yet.
Longer term, we can be more confident that the big themes of deglobalization, decarbonisation, greater government intervention, demographic shifts and greater polarisation will be the likely drivers of markets and asset returns. Market regime changes do not happen often but when they do, it can often be quite a painful transition. In the months and years ahead, we suspect investors may need to prepare for shorter boom/bust cycles, greater volatility and broadly lower market returns at least in real terms.
We are part of an industry that is facing tremendous, maybe existential, change, which is unlikely to look the same five to 10 years from now.
When speaking to our equity and multi-asset investors, these are the top considerations they are watching out for in 2024:
- Impact of higher rates
Several investors are unsettled by and focused on the delayed impact of higher interest rates. As corporations refinance their debt at higher rates, they will need to find cost cuts to offset increased expenses which might lead to redundancies. We believe the increased burden of more expensive corporate debt is underappreciated by the market. US house prices do not fully reflect the reality of higher rates and could still face a correction. Historical data suggests an environment of steep interest rate rises could be riddled with problematic events – could there be further business casualties ahead?
- Inflation
Several of our investors highlight inflation as their primary focus. We wonder if inflation can fall enough in the US to allow the FED to cut rates. If that occurs, it could provide a favourable backdrop for risk assets, as we believe that long-duration stocks should benefit greatly from a fall in interest rates if the inflation battle is over and the FED can start cutting rates.
- Economic growth
Some investors believe the conversations surrounding 2024 positioning begin with the recession versus no recession debate. We are particularly focused on GDP growth in Europe, where stocks are priced for a weakening economy, but there are some signs of upside relative to modest consensus expectations.
- Credit spreads
The direction of credit spreads will be an effective positioning bellwether. If credit spreads deteriorate we will want to be more defensively positioned. However, if credit spreads continue to decline, risk appetite will improve.
- China growth
China has provided a great deal of fuel for global economic growth in the past. However, that engine of growth has been sputtering post-Covid and continues to act as a dampener on global growth. We believe it is possible that this sentiment could be overdone and China’s growth outlook may surprise to the upside, and that this could represent an important signal that could benefit global markets. A growing shift in trade patterns has benefitted the Asian region. Fears of de-globalisation slowing growth have shifted to optimism about re-globalisation, with trade shifting from a China/US axis to one that incorporates more inter Asia. Chinese export growth has continued to grow as a result.
Whilst we cannot accurately predict what will happen next, our job as investors is to remain flexible and willing to evolve our thinking as the facts change. Against today’s backdrop of unprecedented economic challenges, this approach has never been more vital.
