2024 Outlook

Research powered investment

Your guide to the year ahead in global markets

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.

Read our CIO's overview

 

Outlook 2024 podcast

Macro scenarios and investment implications

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.

60% 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.

 

How it could play out

Growth

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).

Inflation

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.

Monetary policy

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.

Fiscal policy

Neutral stance

No major shift in fiscal stance.

What asset allocation could look like

Equities

Avoid financials, real estate and commodities.

Bond proxies may be the best place to hide.

Make defensive moves early.

Fixed Income

Medium-duration inflation-linked bonds.

Money market funds.

Move to nominal bonds towards end of year (as rates decrease).

Private credit

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.

Real estate

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.

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20% probability

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.

 

How it could play out

Growth

Slightly below-trend slowdown

Growth in major economies settles at (or slightly below) trend.

Inflation

Back to target

Disinflation brings core inflation back to target; no major additional shocks to headline rate.

Monetary policy

Back to neutral

Central banks start cutting rates, going back to historical levels of implied neutral rates.

Fiscal policy

Neutral stance

No major shift in fiscal stance.

What asset allocation coud look like

Equities

Financials and retailers, commodities, emerging markets.

Appreciating yen makes Japan attractive, especially consumer stocks.

Fixed Income

Quality investment grade should be core but continuing growth offers room to move into higher yield. Be selective.

Private credit

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.

Real estate

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.

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10% probability

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.

 

How it could play out

Growth

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.

Inflation

Reversal of inflationary trends

Inflation reverses as debt deleveraging takes hold.

Monetary policy

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.

Fiscal policy

Constrained stimulus

Fiscal policy kicks in when growth outcomes become very painful, although monetary policy will still be the main backstop.

What asset allocation could look like

Equities

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.

Fixed Income

Look for duration.

"Safe haven" currencies such as USD.

Private credit

Investment-grade structured credit tranches.

Special situations and distressed debt.

Highly-rated, lowly-levered senior secured loans and direct loans.

Real estate

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.

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10% probability

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.

 

How it could play out

Growth

Continued resilience

Resilience in US growth continues and Europe's current slowdown reverses.

Inflation

Above target sticky inflation

Following initial disinflation, core inflation remains sticky, settling 1-2 percentage points above central bank targets.

Monetary policy

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.

Fiscal policy

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.

What asset allocation could look like

Equities

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

Fixed Income

Those holding duration will be burned if rates go higher.

Money market funds

Private credit

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.

Real estate

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.

Read our full view

Key themes for 2024

Outlook 2024

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Fidelity Outlook 2024

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