Looking through the uncertainties of 2024

WE ARE calling 2024 the year of the funambulist or tightrope walker, as we see economies walking a fine line to avoid a severe recession.

A substantial slowdown in global growth is likely, with global gross domestic product growth declining from 3 per cent in 2023 to 2.8 per cent in 2024. The United States will likely have a mild recession in the first half, while Europe can avoid a severe recession and recover in H2.

Advanced economies are mostly responsible for the weak momentum of world economic growth, while emerging markets should remain more resilient, with Asia ex-Japan likely to be the main contributor.

As inflation further decelerates in most developed markets, we expect central banks to start to cut interest rates from mid-2024. Our central forecast is that the Fed funds rate will stand at 4 to 4.25 per cent at end-2024, down by 125 basis points (bps) from today, and the European Central Bank’s deposit rate will decline by 100 bps next year to 3 per cent.

Asia macro outlook: moderate recovery in China

We expect a moderate recovery in the Chinese economy to extend into 2024 as recently beefed-up government policy support will likely continue. China’s GDP growth is forecast to come in at 4.7 per cent in 2024, compared to the 5.2 per cent expansion in 2023.

The property sector will likely remain a drag on growth, although to a lesser extent than before. More financial support for developers is needed to stabilise the sector, but some recently announced measures seem to point in the right direction. Fiscal stimulus will likely play a key role in supporting growth. In addition to maintaining a relatively large fiscal deficit target, addressing the financial stress facing many local governments is another important task for policymakers.

The three risks to the benign scenario of a moderate recovery in China are that policy remains behind the curve; a severe global deceleration; and a resurgence in US-China tensions.

India’s economic momentum should hold up in the near term thanks to strong capex and industrial activity. But further upside may be limited as credit growth may moderate from here, leading to slightly lower growth of 6.5 per cent in the next fiscal year (ending March 2025). Growth in the current fiscal year is expected to clock in at 6.8 per cent.

Slower global growth looks set to weigh on South-east Asia in 2024, although Taiwan and South Korea, the two main tech exporters in the region, could continue to recover thanks to the upturn in the global semiconductor cycle. South Korea’s economy in particular appears to be improving.

Global asset allocation: fixed income more interesting than equities

Overall in the current global environment, fixed-income markets are more attractive than equities on a risk-adjusted basis, especially investment-grade bonds, given the prospective rate cuts and our strong focus on quality.

In terms of duration, the medium-term part of the curve (five to zero years) should offer attractive yields with limited duration risk.

In equities, corporate profitability could be further challenged by lower nominal growth, higher funding costs and tight labour markets. That is already partially reflected in small-cap valuations.

Developed market equities could achieve revenue growth in the mid-single digits in 2024. While we could see mild compression in US margins and the S&P 500 looks richly valued, valuations for European and Japanese indices could hold up better. We expect most returns from equities in 2024 to come from dividends and share buybacks.

Mega tech companies continue to see upward earnings revisions and are the superpower in this equities market, with the rest performing in line with a slowdown or recession scenario. Active management is needed in this environment.

Asia assets: earnings recovery in equities; quality and duration in fixed income

In Asia fixed income, we favour Asian investment-grade corporate bonds due to their defensive characteristics and higher yield, compared to bonds of similar ratings from other developed markets. We are focusing on three broad themes: investment grade and diversification; medium-term duration positioning; and quality in China.

In Asia equities, we expect a broad earnings recovery, outpacing that of other developed markets. In addition, most markets are trading below their long-term valuations and have underperformed other developed markets in 2023.

We are becoming more positive on Korea, where corporate earnings should benefit from a recovery in semiconductor demand.

We have become more cautious on Asean in the near term. The region is benefiting from supply chain reconfiguration, but it is also sensitive to slower global growth. However, Singapore’s safe-haven currency could showcase its defensive qualities against an uncertain geopolitical backdrop.

Despite our positive view on India’s economy, we maintain a neutral stance on Indian equities due to stretched valuations in its equity market relative to the rest of Asia.

Here’s our take on the key investment themes in 2024.

Take on more duration. We believe now is a good moment to move cash and cash-like allocations back into fixed income to lock in current attractive yields, mitigate reinvestment risk and potentially benefit from capital appreciation. As interest rates fall, the potential for bond prices to appreciate grows. Our preference is for “safe-haven” government bonds of up to 10 years’ maturity and investment-grade corporate bonds of up to seven years. Furthermore, the decent coupon offered by bonds provides a cushion against adverse movements in market prices.

Favour companies doing share buybacks. The past years have been characterised by massive liquidity injections by central banks. As this cycle has ended, we are looking for liquidity creation at the corporate level. The present rate environment makes it vital to discriminate between companies with tight cash balances and those that have plenty of cash flow. In particular, look for companies with sufficient free cash for dividends and equity buybacks, as well as those robust enough to pay down their debts and thus free up cash that can be returned to shareholders.

Capitalise on AI’s promise. Until recently, artificial intelligence (AI) was more a concept than reality for many corporations. But it has rapidly become accessible to individuals and corporations. We are optimistic about the way forward, believing that “generative AI” (GenAI) could well improve productivity. 

In terms of business sectors, data-intensive firms seem among the earliest adopters and beneficiaries of GenAI, but interest and investments are growing fast in other areas too. Companies that stand to advance the most are those that are able to monetise proprietary (as opposed to open-use) intellectual property in areas such as semiconductors, vertical software (designed for niche industries and applications) and the vertical cloud.

In healthcare, medtech together with life-science tools and diagnostics look like the segments most likely to benefit from AI in the near term. GenAI will also contribute to the innovation that biopharma and managed-care companies need to stay competitive.

The writer is chief Asia strategist and head of Asia research, Pictet Wealth Management