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How inflation, interest rates and other macro events will shape 2024

19 December 2023

Fund managers reveal their macro outlooks for next year.

By Matteo Anelli,

Reporter, Trustnet

There is a lot of uncertainty going into 2024, with experts and markets starkly split between optimists and pessimists – the former believe we will manage a soft landing and are driving the recent rise in equity markets while the latter are highly sceptical around this scenario and cannot ignore the flashing recession indicators on their dashboards.

Below Trustnet rounds up experts’ views on the macroeconomic picture for next year.


Redwheel’s Clay: Inflation could return à la 1970s

Artificial Intelligence (AI) is being claimed as the saviour to all our problems, according to Nick Clay, manager of the TM Redwheel Global Equity Income fund, and the consensus is that a Goldilocks scenario “is all but a given now”.

“What’s more likely is that rates will come down at the first signs of weakness because this is most governments’ preference, as they cannot afford high rates for longer because they have too much debt,” he said.

“However, central banks relenting too soon increases the probability that inflation does not return to its box. Instead, it returns in waves à la the 1970’s, which could lead to volatility in many asset classes, equities and bonds, undermining real returns greatly.”

Against this backdrop, exhibiting lower volatility will matter, as downside capture will become the most important attribute, and valuation will matter again.

“It will be a time for discipline,” said Clay. “A time to be differentiated from what is now a very concentrated herd of investors. A time when one’s total return will again be driven by the compounding of income and not capital growth.”


Rathbone’s Smith: Valuations are a terrible market-timing tool                                                                                                                                       

Edward Smith, co-chief investment officer and multi-asset strategist at Rathbones, said it is worth taking “a sober look at the challenges that still lie ahead”.

“The various goldilocks scenarios could be summed up as ‘it’s different this time.’ Statistically, it could be different,” he said.

“But it would be bold to ignore the aggressive rise in interest rates, tighter bank lending conditions, falling real sales and profit growth, an inverted yield curve, contracting money supply and rising unemployment, when these indicators are all flashing at the same time.”

However, much like the effects of monetary policy, the lags between these warning signals and the start of a downturn are long and variable. US recessions usually arrive 18-27 months after the first Federal Reserve rate hike and globally 14-24 months after the inversion of the yield curve. That covers most of 2024.

A “fundamentally weak” profit environment may challenge “all but the highest-quality companies” in the first half of 2024, and another one or two large dips “wouldn’t surprise” Smith.

But with many market segments offering very attractively priced opportunities, there’s “much to look forward to”.

“On their own, valuations are a terrible market timing tool – when something is cheap it tells you nothing about the likelihood of it getting cheaper over the next year,” he said,

“But there is a strong link between valuations and longer-term returns, and as long-term investors, we are looking at the valuations in many areas of the market with great excitement, particularly among smaller and mid-market companies.”


Mirabaud’s Lake: When the economic slowdown hits and rates begin to fall, risk outperforms

Andrew Lake, manager of the Mirabaud Global Strategic Bond fund and the recently launched Mirabaud Fixed Maturity fund, is expecting US inflation to swiftly track downwards from the highs of 2023, but ultimately settle between 2.5% and 3%.

“Interest rate reductions therefore seem inevitable in 2024 (led by the Federal Reserve but with the UK and Europe following neatly behind) as we move towards a much slower economic environment. This in turn should reduce general uncertainty, which is what has driven market directionality this year,” he said.

“When the economic slowdown hits and rates begin to fall, this is when we would expect risk to outperform. Our target on high-yield bond spreads is around 500 basis points; we believe this level would indicate a clear buying opportunity. Then, as rates are cut to stimulate growth, we would expect to see lower-quality credit begin to perform.”

Should inflation surprise and further hikes be needed, all would not be lost for bond investors, as high carry instruments, such as global investment grade bonds and high-quality global high-yield bonds, should still deliver positive returns, concluded the manager.


Liontrust’s de Uphaugh: The UK could be a safe haven in a mixed international backdrop

A year of decisive elections in over 40 countries awaits next year, with half the world’s population going to the ballots in 2024, presenting additional risks for investors.

The international backdrop is “mixed” according to FE fundinfo Alpha Manager James de Uphaugh, who co-runs the Edinburgh Investment Trust.

“For the enduring structural competition between the US and China, the temperature will ebb and flow but it is enduring, inflationary and a source of potential risk. China is also struggling to find the impetus for growth now that it has had its building boom,” he said.

“We have numerous elections comping up, some with populists on the ticket with erratic agendas. Against that mixed international backdrop the UK could be something of a relative safe haven: our own election will be characterised by two main parties where the manifestos are relatively centrist – a benign backdrop for the UK equity market.”

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