Mid-Year Outlook 2024

The global economy has surprised to the upside in the first half of 2024. At Citi Wealth, we were more optimistic than many entering this year, particularly those forecasting recession. However, the renewed expansion has gathered pace even sooner than we might have expected. We now forecast global growth of 2.6% for this year as a whole and 2.8% in 2025.

Since 2020, the world has experienced intense upheaval with the largest swings in output and inflation since World War II. The steep drop in output around the pandemic was short. Excessive stimulus and rising consumer prices have persisted longer. The Russia-Ukraine war also imparted an intense shock to energy supply chains.

Now, though, greater stability is taking hold, with inflation coming down. Admittedly, inflation in the US has proven somewhat stickier than we had thought likely. However, an aggressive monetary tightening cycle, easing supply chain disruptions and less wild demand swings as COVID spending patterns wane. By the end of 2024, we forecast US CPI inflation to have fallen to around 2.5%.

Despite our expectation of further growth and normalization, we are mindful of what could go wrong in 2024 and beyond.

Were inflation to prove more stubborn than we expect, interest rates may have to remain higher for longer, perhaps even as the jobs market continues to cool. And an inflationary supply shock could weaken profits without relieving rate pressure.

Higher US borrowing costs and a stronger dollar might produce a range of negative effects elsewhere in the world, but particularly in emerging economies.

As investment professionals, we remain focused on the underlying value opportunities when the “noise level” predictably increases. Over the months ahead, we believe markets may become increasingly captivated by the unpredictable US presidential and congressional election results.

The choice of US president alone will be critical for US foreign policy, with great importance for security and trade with some countries. But the choice is highly unlikely to dictate the direction of the economy and overall market opportunity. 

We need be prepared for a range of possible impacts without derailing core portfolios.

The world has shown resilience in the face of macroeconomic shocks in recent times. We have long noted the pattern that regional conflicts and geopolitical “close calls” very rarely catalyze a change in the direction of the world economy.

Global diversification helps portfolios withstand regional shocks whose impact can be much greater upon local assets than ones elsewhere.

What further geopolitical challenges might the world encounter in the coming years? We consider five potential scenarios that concern many investors:

As the war in Ukraine grinds on, it is important not to lose sight of the risk of spillover. The flow of Western weapons and real-time intelligence to Ukraine continues to infuriate Russia, especially given Ukrainian strikes upon its territory.

The Israel-Iran hostilities in April were a deliberately contained affair. However, broadening conflict is not out of the question.

In an ever more digitized world, the data and networks that enable our existence are increasingly in the firing line. Cyberwarfare is already a distinctive front in the Russia-Ukraine war.

The hegemonic great power rivalry between the US and China — the world’s first and second largest economies — is likely to increase, whatever the outcome of November’s US elections.

Relations between the Koreas have deteriorated lately. North Korea’s leader began 2024 by declaring South Korea the “principal and invariable enemy,” disavowing peaceful reunification.

US large-cap equities have been on quite the winning streak. From the depths of the Global Financial Crisis at the end of 2008 to the end of 2023, this sub-asset class — as represented by the S&P 500 Index — has registered an annualized total return of 14.3%.

And over the last five quarters, much of US large-cap equities’ dominance has come from a handful of leading technology firms, the so-called “Magnificent Seven.”

This performance has prompted some investors to ask a searching question: has portfolio diversification had its day? After all, anyone who put their entire equity allocation or even their entire investment wealth in US large-cap equities would have enjoyed strong returns.

However attractive it may sound, an equity allocation to just one geography - or a handful of large, top performing stocks from that geography – is significantly risky. Citi Wealth’s investment philosophy is rooted in global diversification across asset classes. This is not based merely on theory but also on our decades of experience building portfolios.

The “Magnificent Seven” US tech giants have captured investors’ imagination. However, some investors may still feel tempted to hold only the Magnificent Seven, given recent outperformance, but we believe such a concentrated bet would be unwise. Put simply, today’s leaders may not prove to be those of tomorrow. Between 1991 and 2023, the S&P 500’s top ten constituents by capitalization each year underperformed the broader market in subsequent years, observed over multiple time horizons (see figure 1).

While we acknowledge the attractions of tech leaders broadly, we would not make such holdings a substitute for diversified US equity exposure.

This chart shows the cumulative return comparison between Top 10 and S&P 500 between 12/1/1991 and 8/1/2023.

AI-Propelled Digitization

• The AI revolution is still only in its early stages. We like AI infrastructure and select AI users such as robotics and automation, drug discovery, and cyber security grid constructors and power generators near data centers.

Energy Transition

• The clean energy transition is vital to prosperity and wellbeing. We favor renewable energy technology specialists, those with energy efficiency enabling AI solutions, and their beneficiaries, publicly traded and private.

Healthcare — Longevity and Aging

• Aging populations, growing wealth, and technological advances could drive healthcare returns over the long term. Short term valuations are attractive; we favor exposure via specialist actively managed strategies.

G2 Polarization

• The US-China strategic rivalry is set to intensify, reshaping global trade, geopolitics, and many investments. We favor the likes of supply chain diversification beneficiaries, copper-related investments and tech leaders in the US and China.