As we enter 2024, we are faced with several conundrums as investors. Given how high interest rates are, how has the world economy avoided recession? Is a downturn imminent? With all of the geopolitical challenges, what should we consider when investing for the future?
It is clear that there is much to be optimistic about as the world economy returns to normal after the pandemic. We believe both bonds and stocks are attractive investments, making balanced portfolios valuable to investors.
One risk for long-term investors can be the inclination to hold too much cash. We expect that rates will fall over the next 12–24 months and that returns on cash will drop rapidly. The Fed forecasts that its key policy rate will fall to a "longer run" normal of 2.5% over the next few years.
Investment-grade bonds with a similar duration yield more than twice this rate today. This is why we encourage our clients to determine their true liquidity needs and take this moment to consider adding appropriate investments to diversified portfolios. Historically, balanced portfolios have outperformed cash over time.
Our insights are designed to help you seek your individual investment objectives, and our team is available to help you define and achieve your goals. We hope that the ideas and opportunities presented will enrich your portfolios in 2024 and beyond.
What is “Slow then grow”?
We see 2024 as an important transition year that sets the stage for more sustainable rates of growth and market returns ahead.
We are entering a period of normalization and growth in 2024–2025 and are exiting a period of rolling sector recessions and unusual levels of employment demand to begin a global economic recovery led by the US.
Our "Slow then grow" thesis sees a deceleration in economic activity during the early part of 2024, but no synchronized recession, followed by an economic acceleration later in the year. Our global gross domestic product (GDP) estimates for 2024 and 2025 are +2.2% and +2.8%, respectively.
Taking Advantage of the “Big Reset”
What is the Big Reset?
The "big reset" in financial markets is happening across equity, fixed income and alternative investments. Its simplest explanation is that after a period like 2022 when stock and bond performance is deeply negative, markets tend to first heal and then recover toward historically normal ranges of activity.
The big reset is happening without a major recession. For many investors, the absence of a plunge in financial markets in 2023 could be a mixed blessing, failing to provide the "all clear" signal they might prefer to begin investing again.
In our view, it would be unfortunate for investors to miss this moment as many asset classes are poised to recover in a fairly synchronous manner, with equity, debt and alternative investments possessing both unique and related reasons for their return to potential solid returns.
This is why trying to time markets will be impossible in 2024. It is time, instead, for investors to reset their expectations upward. Investors can potentially benefit from fully invested, broadly diversified portfolios.
We believe, at this moment, the "balanced" portfolio is poised for stronger performance over the next decade than it has experienced in some time. Diversified portfolios may also protect portfolios from security concerns and unpredictable election results, two impending risks.
It's also a good time to revisit the basic principles of a core portfolio construction. That includes taking a professional approach, restoring bonds to their traditional role as anchor and diversifying within and across asset classes.
The two pillars of investment returns — income and growth — appear reinvigorated. For the first time in many years, perspective returns across major asset classes look promising.
Maintaining exposure to growth and income through a balanced allocation to traditional and (for certain investors) nontraditional asset classes allows a portfolio to benefit from economic development, help minimize losses and potentially beat inflation.
These are key to accumulating and sustaining wealth over time.
- Global GDP growth slows to +2.2% in 2024, strengthens to +2.8% in 2025
- Despite slowdown, no broad-based economic collapse
- US to lead the world in this “slow then grow” pattern
- The US Fed done raising interest rates, likely to cut moderately in 2024
- US inflation to dip to 2.5% by end-2024
- 10-year Treasury yields set to drop from 5% to c. 3.75%
- Weaker US dollar to help Europe and Asia to grow after “slow”
- Global earnings per share up 5% in 2024 and 7% in 2025
- Main risks: further supply shocks or deeper weakening in China
- Elections, geopolitics may cause investor anxiety without changing markets’ course
Unstoppable Trends Are Changing the World
Unstoppable Trends are long-term phenomena that are transforming how we live and do business. We seek portfolio exposure to these powerful forces.
- We expect 2024 to see major AI buildout amid easier financial conditions. We favor semiconductor equipment, robotics, drug discovery and cybersecurity equities.
How OPEC is fueling the sustainable energy transition
- By boosting oil prices, the world’s most powerful energy cartel is incentivizing the sustainable energy transition. We seek near-term income from Western traditional energy related firms; copper related investments vital to the transition; financially robust green energy firms longer term.
Increasing longevity and healthcare innovation
- As human aging and technological advances persist we identify attractively valued healthcare investments such as medical technology and tools firms and value-based care providers that have underperformed pharmaceuticals.
G2 polarization: The global technology industry
- As global tech supply chains bifurcate, we build exposure to both sides’ technological champions; agile supply chain fragmentation beneficiaries, with many in the likes of Vietnam and Mexico; US, Japanese and European robotics and AI-powered logistics suppliers; and industrial real estate trusts owning factories and warehouses both sides of the Atlantic.
Our Top 10 High-conviction Opportunistic Investment Ideas
We believe a long-term core portfolio should contain about 85% of a client’s wealth outside of their business assets and homes. An opportunistic portfolio can perhaps complement these holdings, seeking to strengthen diversification, potentially improve risk-adjusted returns or both. In Wealth Outlook 2024, we detail the following opportunistic ideas:
- Semiconductor equipment makers
- Cybersecurity shares
- Western energy producers, equipment, and distributors
- Copper miner equity/clean energy infrastructure
- Medical technology & tools companies
- Defense contractors
- Private capital asset management firms
- The Japanese yen and yen-denominated tech and financials
- Private credit and structured debt securities
- Normalization of the US yield curve