EFG investment experts see the most likely scenario for the global economy in 2024 as a soft landing, with GDP growth of around 2.5-3.0%. In the Bank’s view, the US should avoid a marked recession and grow faster than most other advanced economies, as it did in 2023. The pattern of growth across different sectors will continue to shift: Following the increase in spending on services (e.g., leisure, transport and entertainment) in the last couple of years as economies re-opened after the global pandemic, 2024 could signal a return to spending on physical goods, driving an increase in the worldwide production of consumer goods.
All eyes will once again be on the US economy in 2024, given its impact on global growth. US productivity grew at a rate of just 1.2% in the decade prior to the pandemic. However, it surged to 1.175% in the third quarter, equivalent to an annualised rate of 5.2% in 2023, rekindling hopes of a tech-driven productivity renaissance. An improvement in productivity to around 1.5% per year appears feasible. With continued population growth, the US would then be set to maintain GDP growth of around 2% annually. Emerging and developing economies are expected to outpace advanced economies in 2024, even though EFG’s investment experts and economists anticipate that China will settle into a pattern of slower growth averaging around 4.0% to 4.5% per year.
As global inflation comes down, investor attention will shift to the scale and timing of interest rate cuts by central banks in 2024. The pace of rate cuts will be key for many asset classes next year. The uncertainty surrounding policy easing creates significant reinvestment risks for fixed income investors, who may therefore favour maturities in the intermediate part of the curve as protection against those risks.
Fall of interest rates, lower financing costs
The fall in interest rates expected in 2024 should be accompanied by lower financing costs. This could see spending on energy transition projects pick up again as climate concerns return to the fore. EFG investment experts and economists expect to see a greater supply of ‘green’ and ‘blue’ bonds to address growing investor demand. They also see a much more positive outlook for 2024 for wind, solar and battery storage projects, which had been adversely affected by higher financing costs as interest rates rose in 2023 and, in some cases, by the setting of unrealistically low future price guarantees.
In 2024, stock selection will remain key and EFG anticipates that small cap stocks could outperform large cap stocks. Small cap stocks tend to produce higher returns than large cap stocks over a long period of time, however more recently smaller companies have under-performed significantly.
Artificial Intelligence was the runaway theme of 2023. In 2024, EFG economists and investment experts believe that the soaring popularity of weight loss drugs could replicate this trend. If so, this could have important implications for the consumer staples and healthcare sectors going forward. Certain sectors we believe have been unfairly punished and this creates the opportunity, especially if the new wave of weight loss drugs replicates the “diet fads” of the past.
Renaissance of Japan’s corporate sector
EFG expects undervalued currencies to recover in 2024. The downtrend in the US dollar’s valuation on its nominal and real exchange rate indices has been uneven against different currencies, notably the Japanese yen. Japan’s currency appears to be undervalued across almost all measures of purchasing power parity and equilibrium exchange rates at present. 2024 is a year when we anticipate the yen will likely experience a correction. The move away from Japan’s zero interest rate policy, a continued recovery in the Japanese economy and the renaissance of the country’s corporate sector will drive the appreciation of the currency.
Looking at fixed income markets, EFG favours bonds with three-to-five year maturities in government and investment grade corporate debt for 2024, as shorter-dated maturities have historically offered protection against the reinvestment risk associated with declining short-term interest rates. Inflation-linked bonds appear attractive because of the high real yield that they now offer and the fact that they do not already price in too high an inflation outlook. Selected convertible bonds continue to provide the security associated with fixed income exposure and the upside potential from small-cap equities.
Governments around the world are faced with large budget deficits and high levels of debt. Fiscal conservatives stress the need to cut government spending or raise taxes, with unfunded budgets likely to be pounced on by bond vigilantes, as the UK discovered in late 2022. This challenge could become even more prevalent in 2024 with upcoming elections in the US, the UK, India and many more countries.
Moz Afzal, Global Chief Investment Officer at EFG: “2024 is set to be an interesting year, with many trends, such as rising interest rates coming to an end. The pace of such easing will determine the path for financial markets. Alongside elections, fiscal threats, demographics, as well as the thematic trends of artificial intelligence and weight loss drugs, 2024 will no-doubt be a year of challenge and opportunity.”
Overview of EFG’s top-ten convictions for 2024:
- World economy on course for a soft landing: Our most likely scenario is for a soft landing for the world economy in 2024. Global economic growth of around 2.5%-3% is likely, with emerging and developing economies growing faster than advanced economies.
- Productivity gains: US productivity could benefit from a tech-driven productivity renaissance in 2024. AI could boost labour productivity, which we think – combined with population growth – would lead to a maintained GDP growth of around 2% p.a. in the US.
- Fiscal fragility: Governments around the world are burdened with large budget deficits and high levels of debt. This is a problem in the US in particular, where there is a structural imbalance between revenues and spending, which will continue in 2024.
- Political turbulence: More than half of the world’s population lives in countries that will hold national elections in 2024. The US elections – with the possibility of Donald Trump staging a return to the White House – will attract the most attention and are likely to have the most far-reaching consequences.
- Demography is destiny: It has often been said that demographics are destiny. For any economy, the size of its population, its age distribution and how many people are working are key drivers of economic progress and of deflationary forces.
- Weight loss and consumer staples: The popularity of weight loss drugs could surge in 2024. This market has huge potential but its impact on the consumer staples sector has been exaggerated.
- Clean energy transition: The transition from fossil fuels to clean energy remains of the utmost importance but progress stalled in 2023. We see it regaining lost momentum in 2024.
- Undervalued currencies recover: The long upward trend in the US dollar’s valuation on its nominal and real exchange rate indices came to an end in around late 2022. We expect undervalued currencies, notably the yen, to recover in 2024.
- Bond opportunities: We see interesting opportunities in bond markets for 2024: bonds with three-to-five year maturities in government and investment grade corporate debt, inflation-linked bonds and selected convertible bonds.
- Favour small cap stocks: Small cap stocks have historically tended to produce higher returns than large cap stocks over time – this trend in our view is likely to reassert itself.