The Year ahead: Market Themes for 2024
At the start of 2023 four key themes were identified, namely global inflation, interest rates, a US recession and China re-opening. Now, 12 months later the first three themes remain relevant, if not more important and a fourth theme, artificial intelligence, and its practical implementation, has been a hot topic.
High inflation
Post the COVID-19 lockdown the world has again been reminded of the influence of high inflation after many years of benign inflation. We have gone through a period where inflation was expected to be transitory to a realisation that Central Banks needed to act swiftly to get inflation back to reasonable levels. This saw roughly 500 basis points of interest rate increases in both the US and South Africa over a very short period, in the hope that inflation would return to the respective target levels.
While inflation has moderated from the peak levels, target levels have not yet been reached, which has fuelled the current debate around what subsequent moves from global Central Banks should be. Should interest rates be further increased to further reduce inflation to the target level or have inflation expectations moderated enough for interest rate cuts to start? The previously hawkish stance of central bankers has turned more dovish during the last quarter of the year which has led to markets starting to price in the likelihood of rate cuts in 2024. This had a positive effect for overall sentiment which in turn saw stock prices and bond yields rally. The temptation is therefore to increase the allocation to growth assets in portfolios in anticipation that the peak in interest rates have been reached.
A Cautiously optimistic approach to asset allocation
As always, central bankers must strike a delicate balance between inflation targeting, influencing GDP growth and affecting currency exchange rates . Cutting short term interest rates is likely to be positive for stocks and bonds but any upside surprise to inflation may force central banks to not only pause a cutting cycle but continue increasing interest rates which would have the opposite effect on asset prices. Cautiously optimistic therefore remains the appropriate approach when applied to asset allocation.
The likelihood of a US recession
The debate regarding a US recession has improved. A year ago, financial markets had anticipated a severe economic downturn or hard landing. However, the US economy has proven resilient, with unemployment remaining low. As a result, the current view is that a mild recession or soft landing is more likely. A US recession is important as historically equities have performed poorly during these times. Emerging markets asset prices have also declined during US recessions, and cash has offered protection. A view on the expectation of a US recession therefore remains an important consideration to factor in when deciding on the balance of risky assets in portfolios.
The impact of artificial intelligence
The fourth theme is arguably less market related and may have applications in a variety of fields. The initial thought when considering artificial intelligence (AI) in the financial world is generally how to invest in the technology to benefit financially, like the share price performance of AI chip manufacturer, Nvidia, the leader in this space. What has also been revealed more recently is the ability of AI to improve efficiencies in many spheres of business and academia and the accessibility of the technology to implement these improvements. While it may still take some time for AIto become mainstream, in the same way that it took a while for the internet to be broadly used, there is little doubt that AI will become a widely discussed topic and applied more and more over time.
As has been the case since the COVID-19 lockdown, Central Banks worldwide will continue to be faced with the unenviable task of moderating inflation to achieve a consistent level close to their target levels while not having a negative impact on economic growth. Markets are watching this closely and making investment decisions based on the changing expectations. At the same time, the world will be assessing how not only to benefit financially from AI, but how to use it to gain strategic advantages and not be left behind
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