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The economic outlook for 2024 feels significantly less murky than it did going into 2023. And yet plenty of uncertainty remains about the specifics of Federal Reserve policy changes and global central bank reactions, China's potential rebound, and the influence of geopolitical dynamics on global economies. Amidst the myriad of factors influencing market performance, accurately forecasting these five macro calls will likely play a pivotal role in shaping portfolio returns for investors this year.

1. The Federal Reserve (Fed) will finally pivot into a slow cutting cycle.

In 2024, like in recent years, the Federal Reserve policy rate trajectory remains top of mind for investors. Our anticipation of Federal Reserve rates reaching a peak between 5.25% and 5.50% proved accurate last year, signaling what many perceive as the conclusion of the prolonged period of monetary tightening. I've maintained a cautious stance regarding market expectations for early and substantial rate reductions this year, primarily due to the belief that achieving the 2% inflation target will be challenging. Instead, the Federal Reserve will likely delay policy easing until mid-year, implementing only a limited number of cuts throughout 2024. Market sentiment has gradually aligned with this viewpoint, leading to considerable fluctuations in the bond market.

While we are eager to see the door close on higher rates, it is imperative to recognize that the Fed cannot consider easing policy until inflation pressures are convincingly contained. There likely needs to be a slight cooling in economic activity and rebalancing in the labor market to drain out the most stubborn of inflationary pressures before the Fed eases policy. Indeed, the 1970s experience, when the Fed cut rates prematurely and inadvertently reignited inflation pressures, serves as an important reminder to the Fed to gather sufficient evidence of disinflation before it cuts. However, the door should be open for monetary easing in the second half of the year. While it will be a historically shallow easing cycle, the positive growth economic backdrop should still ensure a constructive investment environment.

2. Global central banks will follow the Fed’s lead in cutting rates.

While we have already seen a few emerging market central banks start to reduce interest rates, many of the developed markets have only just finished their hiking cycles. Typically, as the largest economy in the world, the U.S. sets the stage, and global central banks wait for a signal from the Fed before they begin their easing cycles. The current cycle should be no different. The European Central Bank, the Bank of England, and the Reserve Bank of Australia – to name a few – are all waiting to gather sufficient evidence of sustained disinflation before they enact rate cuts. While their preference would be to wait for the Fed to be the first mover in easing monetary policy, once they start rate cuts, the BoE and ECB are likely to move with greater urgency than the Fed as they are facing a greater risk of protracted economic downturns. The big picture is, however, that there will be a synchronized global monetary easing cycle in the second half of the year.

Importantly for investors, once central banks – particularly the Fed – start to cut interest rates, we expect to see a flood of assets out of money market funds that will find a new home across asset classes. On the equity front, there are pockets of opportunities despite expensive valuations around the world. Within the U.S., small cap is one of the more attractively valued sectors and should benefit as solid economic growth is accompanied by policy easing. Outside of the U.S., Latin America exhibits attractive valuations while parts of Asia – particularly India – demonstrate strong fundamentals. Within fixed income, as slowing growth coupled with policy rate cuts should put downward pressure on bond yields, investors should consider extending into longer-duration bonds.

3. 2024 will be a more stable year for China.

Due largely to the mired property sector and lackluster reopening data, China’s economy struggled in 2023. Unlike many other countries, China’s property market is at the heart of its economy. In fact, 60% of China’s wealth comes from property accounts (the same data point is just 30% in the U.S.) If China's economy is to see improvement in 2024, policymakers need to address (and make progress on) the challenges within the property market.

The good news is that policymakers are gradually increasing their stimulus measures, clearly troubled by the pervasive weakness in the economy and investment backdrop. The bad news is that while 2024 should be a more stable year for China, a sharp stimulus-driven recovery, like we have seen in previous years, is unlikely. Policy actions will need to be more forceful and more targeted at the property market if they are to rescue the economy from debilitating weakness. As such, investor interest will likely remain lackluster until economic momentum can be effectively reinvigorated.

4. Geopolitical unrest, particularly in the Middle East, poses a moderate risk to the 2024 outlook.

Generally, geopolitics do not have a sustained impact on the markets – instead a quick move down is most often followed by a swift recovery. However, tensions involving supply chains and oil prices can fundamentally impact growth and inflation. At the start of 2024, having enjoyed the disinflationary path of last year, investors were not adequately pricing in the inflation risks, and therefore risks to the central bank policy paths, emanating from geopolitical conflicts. Yet, over recent weeks, a growing appreciation of the threat has added to bond market volatility. While oil prices remain quite low, supply chains have been impacted by the geopolitical tensions in the Middle East. Shipping costs have increased, raising the risk of renewed price pressures. Keep an eye on both shipping costs and oil prices for the foreseeable future – sustained increases may feed through to inflation expectations, making it more challenging for global central banks to start cutting interest rates as expected.

5. The biggest risk for the economy in 2024? Accelerating growth.

Heading into 2024, continued growth acceleration puts the economy and the path of the global central banks at risk. If economies continue to see growth above trend, inflationary pressures are likely to build up again. In that situation, the Fed and other central banks would be more likely to raise rates than to cut them. This would inevitably set up a potential hard landing in 2025, something the Fed has been working hard to avoid. The best-case scenario for investors in 2024 is gently decelerating growth that culminates in a soft landing and Federal Reserve rate cuts.

For our global investment leaders’ complete thoughts on investment themes impacting portfolios and driving market performance in 2024, click here.

Macro views

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