Overview

Consensus was wrong in 2022 and 2023 and we suspect it will be wrong again in 2024. Risks are skewed toward the downside of consensus, which expects both an economic soft landing and aggressive rate cuts by the Fed. US equity analysts, are convinced of a soft landing as well, and expect 11% EPS growth this year. We are more convinced that interest rates will fall sharply in 2024 than the global economy can avoid a recession and US equity analysts will be proven correct. Asset allocators need to be both cautious and nimble in 2024.

We maintain our overweight in global govt bonds and move Auss ie govt bonds from neutral to a small overweight. Australia has a lingering inflation problem that probably requires one more tightening. However, regardless of whether the global economy has a soft landing or recession this year, global government bonds should provide investors with solid returns. It follows then that real assets should do the same and we increase our exposure to infrastructure. Room for our overweight in government bonds and defensive duration is made by cutting our overweight in cash back to neutral.

For a more extensive analysis, visit our “Cross-Asset Outlook 2024 – Walking The Tight Rope” research paper.

The risk of a US recession is not insignificant in our view, and the most important consideration when positioning risk portfolios this year. Bond yields are no threat and equities rally through soft landings, but they get drawn down heavily during recessions. We increase slightly our small underweight in Growth assets for now but may need to move this quickly in either direction over the next few months depending on how our lead recession indicators evolve – currently, they are sending mixed signals. Alternative assets will provide a solid shock absorber to any equity weakness until there is no more recession uncertainty. In equities, we increase our underweight to Australia and move Japan back to neutral alongside Europe.

The Australian dollar has rallied due to USD weakness on the back of Fed rate cuts and appears to be priced for a soft landing. The $A is also sensitive to the US outlook and a recession will lead to USD strength that could sharply drop the $A/$US. We estimate the $A/$US is currently around fair value, but we expect it to depreciate this year to around $A/$US 0.60 as global growth slows.

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