In this article:
I have never managed money on the basis that I know what’s going to happen in 12 months’ time. I may have a view, but good investing needs discipline, an open mind, and a preparedness to react to the facts as they change.
Often, it’s difficult to understand big economic, social, or political shifts until they are well underway and new trends are firmly established. We’re in the first stages of a dramatic regime change - from low inflation and ever declining interest rates to something different. That something different will come with greater economic volatility and the risk premium for holding assets will therefore be higher. We expect rates will tend higher and returns on equity will be much more differentiated across countries and regions.
In this environment I find it more helpful to consider different scenarios: the alternate paths economies and markets could take. My colleagues and I estimate how likely we think each scenario to be, which allows us to prepare sooner, spotting signals along the way that either support or refute a given outcome, so we can adapt accordingly.
In our Outlook for the coming year, we lay out the four macroeconomic scenarios for developed markets that we think investors should keep in mind as 2024 unfolds, while our heads of investment explain what each would mean for their asset class.
And what a year lies ahead. There will be an exceptional run of elections across the world during 2024 coinciding with a renewed interest in fiscal policy. There is a political desire to maintain high budget deficits and government intervention in different forms. Markets will start to exert a greater price for that spending. We are going to be talking about the cost of capital a lot in 2024, not just for corporates but for governments, and not only what interest costs will do in the short run.
The most significant election, of course, will be in the United States. It has long been a destination for safe haven flows and a place to park the proceeds of trade surpluses, helping to fund public and private spending. In a world of reshoring and falling Chinese demand for US goods, the so-called ‘exorbitant privilege’ that comes with issuing the world’s reserve currency appears to be waning. These cracks could easily widen in 2024 and present a temptation for the Federal Reserve to pause or even reverse monetary measures like quantitative tightening.
China’s cycle is in a different place, with implications for other Asian economies that can benefit from the country’s demand. Our 2024 Outlook presents scenarios here, too. Meanwhile, Japan is, like western economies, adjusting to the end of one era and the beginning of another.
Perhaps the biggest shift of all is the effort to build a more sustainable world, and the work by policymakers to push companies and investors further into a transition economy. Engaging with the network of regulators and industry groups through ‘system-wide stewardship’ will continue to be important in 2024 and beyond, a topic our Outlook also covers.
The world is always uncertain. But this is one of those periods when it is not an exaggeration to use the phrase ‘regime change’. Investors will need to stay nimble in 2024, ready to navigate each twist and turn as the real scenario plays out.
- Scenario 1: Cyclical recession - our base case
- Scenario 2: Soft landing
- Scenario 3: Balance sheet recession
- Scenario 4: No landing