Approaching a new cycle

Inflation usually lags growth, but in the current cycle the effects have been immediate and enormous. Looking ahead, inflation should continue to fall closer to the comfort zone of central banks. With inflation expectations falling, the prospect of central banks cutting interest rates is very real. We expect the first rate cuts to happen in the second quarter of this year, which would mark the beginning of a new economic cycle.

Macroeconomy and strategy

What is in store for 2024, and how should investors position their portfolios at the beginning of this year? When it comes to economic growth, we expect neither a boom nor a bust. However, we do envisage a transition from the current cycle into a new cycle. In equities, we would start the year with exposure to quality growth and defensive stocks. In fixed income, investors should take advantage of the current interest rate environment and lock in attractive yields with quality bonds. Regarding currencies, we expect the US dollar to remain rangebound, and within commodities, we still like copper.

Fixed income

Our key message in fixed income is simple: now could be the time to lock in the higher yields of high-quality issuers to benefit from them in the future. In line with this, we reiterate our call for Swiss franc bonds, especially (but not only) for investors who have a different reference currency. For those seeking additional income from emerging market hard-currency bonds, we point to Latin America, the Middle East, and investment-grade Asian corporate issuers. Finally, despite some hiccups, we believe investors should take a closer look at the complex world of subordinated bank debt and corporate hybrid bonds.

Equities

After a slowdown in global growth in early 2024, we anticipate that growth will pick up again towards the latter half of the year, with central banks becoming more accommodative again as inflation continues to slow towards target levels. We maintain our preference for US assets, favouring quality growth stocks along with some defensive exposure, with cyclicals set to come back into focus ahead of the next economic cycle.

Alternative investments

‘Relative value’ strategies and investment styles were our preference within the hedge fund space in 2023, and they remain a top choice for 2024 as we transition to a new macroeconomic cycle that is accompanied by sharply diverging views in the markets. Among other strategies we like, we think the time is ripe for ‘stressed/distressed credit’ on the back of some weaker companies coming under intense pressure due to high financing costs.

What does this mean for investors?

Now that we have entered 2024, the talk is all about when we will finally see the major central banks start to loosen their monetary policy. Until the timing of this becomes apparent, there may be some nervousness in the markets. However, as inflation cools off further, we expect to finally embark on a new, more familiar economic cycle. Barring any wild-card events, we expect both equities and bonds to benefit.

When it comes to overarching themes, the power of the Magnificent 7 and the ability of artificial intelligence to impact all sectors should not be ignored. Furthermore, as always, alternative investments provide another option for increasing the diversification of a portfolio.

For more of our insights, including our outlook on fixed income, equities, alternative investments, Next Generation trends, and more, download our Market Outlook brochure.