2024's Investment Terrain: Cautiously Forward

In 2024, investment managers foresee a cautious economic landscape with potential for a US slowdown or "soft-landing," influenced by weaker consumer spending and policy shifts. Inflation views are split, with some predicting persistent high rates and others anticipating a trend toward disinflation. The consensus leans towards Federal Reserve rate cuts in the first half of the year. Equity outlooks are generally cautious, favoring quality and value, especially in DMs, with Japan being a notable exception. Fixed income preferences lean towards US Treasuries, with mixed views on corporate bonds. Key risks include geopolitical tensions, economic and policy uncertainties, and transversal challenges like energy price spikes. As usual, the actual report for each view is available by clicking on the name of the manager. 

Challenging growth with risk of recession

In 2024, the outlook for US economic growth is largely marked by caution and varied expectations among leading investment managers. Most managers expect a slowdown/soft-landing in the US driven by weaker consumer spending and policy normalization. For example, Wellington Management and Russell Investments forecast a reduction in consumer spending and a shifting of spending priorities towards necessities, influenced by rising student debt payments and increasing energy bills. SSGA observes similar signs of strain on household finances, suggesting that the positive impact of fiscal on households is wearing off.
While also pointing to moderating consumption as a key factor, Allianz GI, Amundi, and Fidelity International expect an outright recession. Allianz GI and Amundi forecast a recession in the US either starting in late 2023 or the first half of 2024. BlackRock also tilts to the conservative side, as it observes that the post-pandemic employment recovery has lagged behind pre-pandemic growth trends, suggesting a weaker economic recovery than it appears.
Meanwhile, Capital Group offers a slightly different angle, describing the US economy as undergoing a "rolling recession" across various sectors, which might help it avoid a traditional recession in 2024 despite high inflation and rising interest rates. KKR is also optimistic as it believes that fiscal spending is more resilient and has a bigger multiplier effect than the consensus thinks.
Except for Japan, the growth outlooks for other major economic blocks are more negative. Investment managers see the UK as facing the greatest risk of recession as it grapples with inflation and the lingering fallout of Brexit, while Continental Europe struggles with demand weakness from China and a global downturn in manufacturing. Views are cautious on Chinese growth as managers are concerned with its economy’s structural transition (deleveraging, property sector woes, aging population, etc.).

Dichotomic view on inflation

In 2024, the outlook on inflation from various investment managers is split between those anticipating persistent inflation and those predicting a trend toward disinflation. Allianz GI forecasts stubbornly high inflation, attributing this to factors like energy price shocks, and extensive monetary policy easing, alongside longer-term structural shifts such as deglobalization, aging demographics, and decarbonization. This view somewhat aligns with T. Rowe Price, which sees inflation risks as skewed to the upside, especially due to energy prices and supply-side pressures, with U.S. wages continuing to grow at a notable rate. Fidelity International also expects US inflation to remain relatively high, projecting it to be around 2.5% in most scenarios, with the potential to decrease or increase depending on economic conditions.
Conversely, Invesco anticipates an uneven but continued trend toward disinflation by the end of 2024, suggesting a bumpy yet overall decline in inflation rates. SSGA strongly supports the view of disinflation, expecting price moderation driven by supply chain normalization and moderating demand, unless oil prices remain exceptionally high for a prolonged period. Amundi also expects inflation to converge towards the Central Banks’ target as demand cools.

“Higher for longer” is less anchored

While all investment managers agree that the Fed has finished hiking, more of them expect a rate cut in 1H24. SSGA believes that the Fed will cut faster than what the market anticipates as they project shelter inflation to moderate meaningfully. Franklin Templeton sees the Fed cutting rate in 2Q24 as the Fed has cut rates on average 10 months after the last hike. Wellington Management is less explicit about timing, but it expects the Fed to be driven by the market, therefore cutting sooner than it should. Allianz GI, T. Rowe Price, Nuveen, Fidelity International, and KKR remain in the camp of “higher for longer”. Based on its internal analyst survey, Fidelity International is convinced that labor cost pressure is well and alive, coupled with upward commodity price pressure caused by the energy transition, rates will stay high.
In the rest of the world, investment managers see the UK as leading the charge in cutting rates given its challenging economy, while for the Eurozone, many expect the ECB to cut later than the Fed to reduce inflation volatility. On the other hand, Japan may undertake a tightening if inflation continues to trend, and the Spring wage negotiation achieves above 3% increase. Finally, in EMs, most managers expect countries such as Brazil, Mexico, or Nigeria to ease their monetary policy as they hiked aggressively and early to control inflation, but there is no expectation for the PBOC to change the course of its accommodative policy.

DM Equities, a tricky bet for 2024

Most investment managers are neutral or underweight DM equities in 2024, except for Japan. Schroders and SSGA all see Japan as an attractive market, citing back positive macro (pick-up in inflation, depreciated Yen) and micro trends (regulatory reforms and corporate governance improvement). Russell Investments echoes this view, but it 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 the expensive valuation 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-cap are relatively attractive compared to large cap and should fare well as the US cycle restarts later in 2024. Oppositely, Fidelity International warns against small caps as they tend to struggle in downcycle. 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 expected 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 REITs 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 only emerge later in 2024.  Views are split for the UK. Schroders argues that UK equities are cheap and are wrongly perceived as UK-centred business while they are mostly global. However, Fidelity International predicts that the UK will underperform due to its large exposure to the energy and mining sectors.

DM Fixed Income: US Treasuries

In general, managers are positive on DM fixed income for 2024. Nuances are on duration and market segments. In the US, most of them 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 IG and HY where most managers note that spreads are tight and do not compensate for an environment of economic uncertainty. SSGA underlines the contradiction that IG spreads stand slightly below their 20-year average while fundamentals are expected to weaken. Fidelity International stands aside from the crowd with an overweight on inflation-linked treasuries as they expect an inflation surprise in 1H24.
Another area where views are mitigated is Europe, while Invesco expects European IG to outperform due to greater economic slowdown and policy easing. 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.

EM ex-China is attractive

The views on Emerging Markets are separated into non-China and China. Except for Russell Investment, SSGA, and Fidelity International, all the managers are overweight EM ex-China equities on the back of a favorable macro backdrop, structural and cyclical growth stories, attractive valuation, and, diversification from DM equities. Matthews Asia highlights that many key EM countries are in strong fiscal health which can offset a slowdown in global economic activities. India and Mexico are now ripping the fruit of previous reforms. Vietnam, Malaysia, Indonesia, Brazil, and Chile stand as potential beneficiaries of friend-shoring initiatives. Franklin Templeton highlights that Taiwan and Korea could significantly recover in 2024 as the technology cycle turns. SSGA is concerned about the consensus view as historically EM equity tends to perform in stable-to-rising global growth and global trade, adequate or abundant global liquidity, and stable commodity prices. Conversely, SSGA is overweight EM hard currency fixed income it sees value in EM HY bonds and expects it to tighter further barring a US recession. Most managers go a step further and prefer EM local currency sovereign bonds. Morgan Stanley IM cites better monetary policies in many EMs compared to developed markets. They highlight high current real yields, falling inflation, and the end or start of easing in tightening cycles. They also foresee technical tailwinds for EM debt in the coming year, noting increased interest from institutional investors.
For China, see the special section below.

Hesitant 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% in 2023 to approximately 3% in the subsequent years. Amundi aligns with this cautious view, predicting a slowdown in China's growth to 3/3.5%. Contrasting this somewhat pessimistic outlook, Franklin Templeton suggests that 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 but 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. However, 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 the managers who are more optimistic about China, they are all selective and 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 greenization, 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. 

Investment Themes

Energy Transition: Schroders and Wellington Management both emphasize the energy transition, despite challenges like political backlash and stretched valuations. They highlight the overwhelming case for decarbonization and note the significant shift towards renewable energy sources, particularly in China, the US, and the EU. This transition is expected to influence investment spending, inflation, and rates, with the US potentially emerging as a key oil supplier. Allianz GI and Amundi also mention the energy transition, with Amundi focusing on areas like the decarbonization of buildings and sustainable farming.
AI and Automation: Wellington Management notes that advances in AI could notably alter the macro environment by boosting productivity and potentially raising long-term real interest rates. Amundi and BlackRock also recognize the impact of AI, with BlackRock seeing it as part of larger mega forces driving market dynamics. KKR includes industrial automation and data/digitalization as part of their key investment themes. While Capital Group concurs with the theme, it warns to “separate the hype from reality” and focuses on tangible AI-driven innovations in specific industries.
Macro themes: BlackRock and KKR both speak to the need for portfolios to adapt to structural forces such as digital disruption, demographic divergence, low-carbon transition, geopolitical fragmentation, and the evolution of finance. KKR expands on this with themes like intra-Asia connectivity, labor productivity, infrastructure super cycle, and the security of everything. More US-centred, Capital Group highlights the ongoing capital spending boom driven by re-globalization. It sees US manufacturing and energy industries benefit from the resulting growth.

Risks to watch

Geopolitical risks 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 risks 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 cyberattacks 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 ECB. 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 added that financial accidents cannot be excluded given the monetary tightening.

We hope this summary gave you an informed view of the latest investment intentions of major institutional investors and will be constructive for your planning this year. Irostors is the first SaaS platform that helps IROs and CFOs simplify investor targeting through IR data. Feel free to contact us to discuss our solutions.