In my previous piece, I looked at how investment managers foresee a cautious economic landscape with potential for a US slowdown or ‘soft landing’, influenced by weaker consumer spending and policy shifts. Looking further afield, there will likely be knock-on effects on other developed countries, as well as more dynamics at play in emerging markets.
Below, I list more key issues for investors in 2024. The actual report for each manager’s view is available by clicking on its name.
Developed market equities are a tricky bet
Most investment managers are neutral or underweight developed market equities in 2024, except for Japan. Schroders and State Street Global Advisors (SSGA) both see Japan as an attractive market, citing positive macro (pick-up in inflation, depreciated yen) and micro trends (regulatory reforms and corporate governance improvement).
Russell Investments echoes this view, but is waiting for sustainable corporate changes to take place. For the US and Europe, the recurring word is ‘quality’ as the business cycle rolls over and the uncertainty about the impact of higher rates weighs on the economy. The US has become a difficult bet for many, given expensive valuations and the highly concentrated market. In addition to quality, managers are focused on value and prioritizing defensive sectors.
Allspring highlights that US small and mid-caps are relatively attractive compared with large caps and should fare well as the US cycle restarts later in 2024. Conversely, Fidelity International warns against small caps as they tend to struggle in downcycles.
Morgan Stanley IM is one of the rare managers overweighting US equity. Still, it is very selective, preferring industrials that benefit from re-shoring, basic materials where there is a supply shortage and consumer staples that have been battered by major uptake in weight-loss drugs. On a more opportunistic basis and joining Russell Investments, Morgan Stanley IM sees significant relative value in segments of real estate investment trusts and listed infrastructure equity.
In general, there is little appetite for European equity as managers worry about the pace of the slowdown on the old continent. T Rowe Price and SSGA note that opportunities may emerge only later in 2024. Views are split on the UK: Schroders argues that UK equities are cheap and wrongly perceived as UK-centric businesses, when they are mostly global. But Fidelity International predicts that the UK will underperform due to its large exposure to the energy and mining sectors.
Fixed income eyes up US
In general, managers are positive on developed market fixed income for 2024. Nuances are on duration and market segments. In the US, most are overweight US treasury, in line with their Fed policy expectations. While SSGA is comfortable with extending duration, BlackRock and Allianz GI prefer short-term treasuries where they expect volatility to be lower.
Views are less unanimous on US corporate investment-grade and high-yield bonds where most managers note that spreads are tight and do not compensate for an environment of economic uncertainty. SSGA underlines the contradiction that investment-grade spreads stand slightly below their 20-year average while fundamentals are expected to weaken. Fidelity International stands apart from the crowd with an overweight on inflation-linked treasuries as it expects an inflation surprise in H1 2024.
Another area where views are mixed is Europe: Invesco expects European investment grade to outperform due to greater economic slowdown and policy easing, while Allianz GI and SSGA are cautious as both are concerned with inflation. For example, Allianz GI expects surprises in core inflation as it sees a genuine wage-price spiral happening in the euro area.
Emerging markets are attractive
Views on emerging markets are separated into non-China and China. Except for Russell Investments, SSGA and Fidelity International, all the managers are overweight emerging markets ex-China equities on the back of a favorable macro backdrop, structural and cyclical growth stories, attractive valuation and diversification from developed market equities.
Matthews Asia highlights that many key emerging market countries are in strong fiscal health, which can offset a slowdown in global economic activities. India and Mexico are now seeing a ripening in the fruit of previous reforms. Vietnam, Malaysia, Indonesia, Brazil and Chile stand as potential beneficiaries of friend-shoring initiatives – the practice of prioritizing trade relations with politically and ideologically aligned countries. Franklin Templeton highlights that Taiwan and Korea could significantly recover in 2024 as the technology cycle turns.
SSGA is concerned about the consensus view because, historically, emerging markets equity tends to perform when there is stable-to-rising global growth and global trade, adequate or abundant global liquidity and stable commodity prices. Conversely, SSGA is overweight emerging markets hard-currency fixed income; it sees value in emerging markets high-yield bonds and expects them to tighter further, barring a US recession.
Most managers go a step further and prefer emerging markets local-currency sovereign bonds. Morgan Stanley IM cites better monetary policies in many emerging markets compared with developed markets. It highlights high current real yields, falling inflation and the end or start of easing in tightening cycles. It also foresees technical tailwinds for emerging markets debt in the coming year, noting increased interest from institutional investors.
Hesitancy about China
Investment managers present a cautiously optimistic view of the Chinese macro economy, acknowledging several challenges while also noting areas of potential growth. On the cautionary side, BlackRock, Russell Investments and SSGA emphasize China’s long-term issues like debt, property market instability, demographic changes and geopolitical risks.
Morgan Stanley IM observes that China’s recent stimulus measures have not effectively revived economic momentum, leading to growth expectations falling short of consensus. These factors contribute to a clouded longer-term growth outlook, with SSGA specifically forecasting a slowdown in real GDP growth from around 5 percent in 2023 to approximately 3 percent in subsequent years. Amundi aligns with this cautious view, predicting a slowdown in China’s growth to between 3 percent and 3.5 percent.
Contrasting with this somewhat pessimistic outlook, Franklin Templeton suggests China might have moved past the worst of its economic challenges, indicating a more positive turn. This view of potential recovery is shared by Ninety One, which expects a more benign medium-term outcome for China, driven by moderating economic growth bolstered by productivity gains.
Delving into the dynamics of Chinese growth, Matthews Asia breaks down China’s growth drivers into manufacturing, property and domestic consumption. It highlights that manufacturing growth is dependent on external demand and trade strategies, while the property sector’s growth is contingent on government support. But it questions the effectiveness of significant fiscal intervention in the property sector and suggests the need for the government to encourage private sector R&D to compensate.
Among managers that are more optimistic about China, there is a certain level of consensus on industry picks. Invesco, Allianz GI and SSGA are positive on China’s technology and green economy sectors. Invesco highlights the importance of re-globalization and ‘greening’, favoring companies with strong technological capabilities and global exposure, especially those involved in the comprehensive green energy supply chain.
This view aligns with Allianz GI‘s optimism about China’s ‘new economy’, encompassing technology, fintech, financial services, health tech and the green economy. Similarly, SSGA sees potential in China’s structural growth areas supported by government policy, such as technology independence and electrification.
Morgan Stanley IM identifies opportunities in consumer-related sectors, automation, semiconductors and industries involved in the green transition and hard science-based fields. Ninety One observes that while sectors like real estate may face pressure, other areas like digitalization, medical technology and certain financial institutions will benefit from trends like an aging population and state-led pension reform.
Risks to watch
– Geopolitical risks: These are top of mind for every manager in 2024. BlackRock dubs it the biggest election year in history. Wellington Management highlights the escalatory potential of tensions in the US/China relationship, especially regarding Taiwan and the US presidential election. Elections also heighten the risk of information warfare. Wellington Management adds the escalatory potential of the Ukraine/Russia war, and the risk of global terrorism, particularly if Middle Eastern conflicts escalate, including the threat of major cyber-attacks on US infrastructure.
– Economic and policy risks: Invesco raises concerns about the potential impact of a lag in rates policy on the US economy, leading to weaker growth than anticipated, and the possibility of persistent inflation requiring policymakers to maintain higher interest rates for longer. For the EU, Amundi points to risks such as bond market fragmentation and excessive tightening by the European Central Bank. Fidelity International highlights the risk posed by China’s anemic growth in 2024 and the constraint on US fiscal policy due to the election year.
– Transversal risks: Amundi also mentions transversal risks like a potential spike in energy prices and a crash in private markets. Fidelity International and Invesco are specifically concerned about oil price shocks in the context of the Russia-Ukraine and Israel-Hamas conflicts. Finally, Invesco adds that financial accidents cannot be excluded, given monetary tightening.
Rui Zhang is CEO of corporate access platform Irostors
