We are in the first stages of a dramatic regime change - from low inflation and ever declining interest rates to an investment landscape marked by greater economic volatility and the associated higher risk premia for holding assets.
Forecasting 2024 is challenging, with ongoing remarkable changes across economies and markets, combined with a year of political uncertainty ahead.
Against this backdrop, we offer four potential paths the world could take, each assigned with its own probability and asset allocation implications, mindful that good investing needs discipline, an open mind, and a preparedness to react to the facts as they change. In addition, we provide standalone 2024 investment outlooks for Asia and on the outlook for ESG.
Discover where our experts believe the key areas of opportunity and risk lie across global financial markets in 2024.
The economy continues to deliver surprises, but we are confident of one thing: if US and other developed world interest rates have not peaked already, they will do so soon. Against this backdrop, growth will stall.
Here we detail four potential scenarios for 2024, and their probability.
Our base case scenario: A cyclical recession would see a moderate economic contraction followed by a return to growth in late 2024 or early 2025. Inflation would be sticky for a period before returning to target, with interest rates staying higher for longer followed by central banks pivoting to cut rates.
Moderate recession
Developed market economies go into contraction followed by recovery later in 2024/early 2025.
Asynchronous timelines for different regions (EA/UK first, US later).
Recession brings inflation back to target
Following a period of stickiness, core inflation falls back to target because of damage to the demand side of the economy.
Higher for longer followed by a pivot
Inflation stickiness forces central banks to remain behind the curve of macro damage. They only start to cut rates when the labour market has definitively cracked. Real policy rates fall.
Neutral stance
No major shift in fiscal stance.
Avoid financials, real estate and commodities.
Bond proxies may be the best place to hide.
Make defensive moves early.
Medium-duration inflation-linked bonds.
Money market funds.
Move to nominal bonds towards end of year (as rates decrease).
Steady approach to senior loans and direct lending.
Non capex, non-cyclical credits with strong earnings visability.
Companies with a client base of businesses rather than consumers eg healthcare or business services software.
Risk-on Goldilocks scenario for offices and logistics.
Sustainable buildings as tenants look for assets that will match corporate values.
An asset pickers market: must select the *right* asset, not just any asset.
Source: Fidelity International, October 2023.
A soft-landing scenario would involve a slightly below trend slowdown across major economies, with no major shocks to knock markets off track. The decision to keep interest rates higher for longer would bring inflation to a level with which central banks are comfortable. This would then allow them to pivot and cut interest rates, easing pressure on indebted households and companies.
Slightly below-trend slowdown
Growth in major economies settles at (or slightly below) trend.
Back to target
Disinflation brings core inflation back to target; no major additional shocks to headline rate.
Back to neutral
Central banks start cutting rates, going back to historical levels of implied neutral rates.
Neutral stance
No major shift in fiscal stance.
Financials and retailers, commodities, emerging markets.
Appreciating yen makes Japan attractive, especially consumer stocks.
Quality investment grade should be core but continuing growth offers room to move into higher yield. Be selective.
Senior secured loans with a focus on lower-rated cyclical credits.
Double-B rated structured credit.
Risk-on approach to direct lending, with more aggressive view on leverage and price.
Offices, particularly in pockets like Frankfurt or Luxembourg where vacancies are low.
Sustainable buildings.
UK attractive due to quick repricing.
Source: Fidelity International, October 2023.
A balance sheet recession would be marked by a deep and prolonged downturn across developed and emerging economies. A serious default cycle would take hold across corporate markets and weaker sovereigns would also come under pressure. Because a balance sheet recession would prompt widespread cutbacks in corporate and household spending, central banks would respond by cutting interest rates aggressively, while inflation would also fall sharply.
Deep recession
Developed and some emerging market economies see deep and prolonged recessions lasting through to year-end as serious default cycles take hold in corporates, with vulnerable sovereigns also under pressure.
Reversal of inflationary trends
Inflation reverses as debt deleveraging takes hold.
Sharp privots from key central banks
Central banks keep rates higher for too long and pivot too late. Lumpy transmission of monetary policy inadvertently triggers deleveraging.
Constrained stimulus
Fiscal policy kicks in when growth outcomes become very painful, although monetary policy will still be the main backstop.
Bond proxies: utilities, consumer staples, healthcare.
Positive on European cyclicals, e.g. industrials, financials. Japan (yen to strengthen); US small-caps.
High quality dividend payers.
Look for duration.
"Safe haven" currencies such as USD.
Investment-grade structured credit tranches.
Special situations and distressed debt.
Highly-rated, lowly-levered senior secured loans and direct loans.
Core holdings with long-leases (nursing homes, supermarkets).
Logistics still attractive given how tightly supplied.
Sustainable buildings as tenants look to save energy costs.
Source: Fidelity International, October 2023.
In a no landing scenario, US economic growth would continue to be resilient while Europe’s current slowdown would reverse. Core inflation would remain sticky and settle one or two percentage points above central bank targets, encouraging monetary policy makers to keep nudging interest rates higher.
Continued resilience
Resilience in US growth continues and Europe's current slowdown reverses.
Above target sticky inflation
Following initial disinflation, core inflation remains sticky, settling 1-2 percentage points above central bank targets.
Higher for longer
With resilient growth and Fed policy makers psychologically scarred by the 2021 experience, policy rates continue to be nudged up. Belated acceptance that neutral rate (R*) has risen.
Neutral to mildly restrictive
Divided government in Washington takes additional stimulus off the table - GOP control of Congress would inject a slow negative drag. In Europe, peripheral economies forced to retrench given negative debt dynamics.
Regions reliant on Chinese growth, such as Europe, Germany and Japan.
European exporters (rather than domestic names).
US: companies with pricing power, and well-structured balance sheets e.g. railways
Those holding duration will be burned if rates go higher.
Money market funds
Lean into floating-rate products for defensive approach.
Lower-leveraged credits that can pass on higher costs to clients.
Cyclical names across structured credit and leveraged loans.
Go risk-off and focus on core holdings with long-term lease visibility.
Crystalise returns once cycle is through.
Potential for distressed buying opportunities.
Source: Fidelity International, October 2023.
Download our guide to the year ahead for the global economy and major asset classes.
All information is current as at its published date unless otherwise stated. Not for use by or distribution to retail investors. Only available to a person who is a "wholesale client" under section 761G of the Corporations Act 2001 (Commonwealth of Australia) ("Corporations Act")
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making any investment decision, investors should consider seeking independent legal, taxation, financial or other relevant professional advice. This document is intended as general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. You should also consider the relevant Product Disclosure Statements (‘PDS’) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 044 922 or by downloading it from our website at www.fidelity.com.au. The relevant Target Market Determination (TMD) is available via www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated about specific securities may change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. You should consider these matters and seeking professional advice before acting on any information. Any forward-looking statements, opinions, projections and estimates in this document may be based on market conditions, beliefs, expectations, assumptions, interpretations, circumstances and contingencies which can change without notice, and may not be correct. Any forward-looking statements are provided as a general guide only and there can be no assurance that actual results or outcomes will not be unfavourable, worse than or materially different to those indicated by these forward-looking statements. Any graphs, examples or case studies included are for illustrative purposes only and may be specific to the context and circumstances and based on specific factual and other assumptions. They are not and do not represent forecasts or guides regarding future returns or any other future matters and are not intended to be considered in a broader context. While the information contained in this document has been prepared with reasonable care, to the maximum extent permitted by law, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. Past performance information provided in this document is not a reliable indicator of future performance. The document may not be reproduced, transmitted or otherwise made available without the prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is Fidelity Australia.
@copy; 2023 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.