As we step into the complex macro and market landscape of 2024, the global asset markets find themselves walking a tightrope, with the spectre of a looming US recession risks casting a significant shadow over the outlook for investment strategies.
In this post, we delve into the evidence-based insights provided by our Foresight Analytics investment advisory team in the “Cross-Asset Outlook For 2024 – Walking The Tight Rope” research paper, aiming to decipher the intricate dance of economic indicators and potential pitfalls.
Global Economic Outlook For 2024
The global economic outlook for 2024 begins by underscoring the substantial risk of a US recession, signalling a pivotal consideration for portfolio risks in the coming 12 months.
“Consensus was wrong in 2022 and 2023 and we suspect it will be wrong again in 2024.”
Foresight Analytics highlights the nuanced nature of this risk, emphasizing the importance of vigilance in the face of mixed signals from their lead recession indicators.
“The risk of a US recession is not insignificant in our view, and the most important consideration when positioning risk portfolios this year.”
While bond yields seem benign and equities typically rally through soft landings, the looming uncertainty of a recession raises questions about the resilience of these traditional trends.
Analyzing Asset Classes: Growth, Alternative Assets, and Regional Underweights
The whitepaper unfolds a strategic perspective on asset classes, advocating for a slight increase in the underweight of Growth assets. However, this cautious adjustment comes with a caveat – a readiness to pivot swiftly based on the evolving recession indicators. Alternative assets emerge as a recommended shock absorber, poised to provide stability amid potential equity weaknesses until recession uncertainties dissipate.
In the realm of equities, there is a call for an increased underweight to Australia and a shift of Japan back to a neutral stance alongside Europe. The Australian dollar’s rally, fueled by USD weakness, is deemed to be priced for a soft landing. However, caution is advised, warning of potential USD strength in the event of a recession.
“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.”
Global Economic Landscape: Resilience, Cracks, and Varied Expectations
Reflecting on the global economic landscape, there is acknowledgment of the temporary easing of the risk of a near-term recession. The US economy demonstrated unexpected resilience throughout 2023, defying initial recession predictions. Factors such as solid wage growth, robust job demand, pandemic savings, and pent-up spending on services contributed to a stronger-than-expected performance.
Yet, as the year concluded, fissures appeared. Labour demand weakened, and bond market signals hinted at an anticipated slowdown, prompting concerns of a potential recession. While economists expect a soft landing, the equity market’s optimism contrasts with bond market pricing and economic projections.
“The risk of a near-term global recession has eased for now but remains a significant risk.”
The US economy proved more resilient throughout 2023 than the consensus expected at the start of the year. At the start of last year, most economists expected a recession to begin around the middle of the year. However, solid wage growth, strong job demand, a high level of pandemic savings, and pent-up demand for spending on services meant the economy was significantly stronger than the consensus had expected.
Regional Insights: Europe, Australia, and China’s Economic Trajectory
The analysis unfolds a nuanced regional outlook, highlighting Europe’s already existing recession, coupled with expectations of weak growth in Australia and the UK.
China, grappling with a self-inflicted property downturn, is projected to announce a growth target of approximately 4.5%.
Detailed data analysis reveals the intricacies of each region’s economic indicators, from manufacturing ISM figures to labour market trends.
Inflation, Unemployment, and the Middle East Conundrum
The consensus view anticipates a soft landing for the US economy, contingent on inflation reverting to target levels by the end of 2024 without further tightening. Foresight Analytics data analytics team raises scepticism about achieving significant disinflation without a concurrent rise in unemployment.
The intricate dance between inflation, unemployment, and the Middle East conflict introduces uncertainty. Either persistent above-target inflation or a rise in unemployment could solve the inflationary challenge. The looming question then becomes the magnitude and timeframe of a potential rise in unemployment, pivotal in unravelling the recession conundrum.
US Financial Conditions and Recession Indicators
The discussion shifts to the heart of the matter – the likelihood of a recession in the United States.
“A recession is still a significant risk, even though consensus thinks it is not.”
The 10-year yield persistently lagging behind the 2-year yield remains a signal of potential recessionary headwinds. The whitepaper introduces a counterpoint, citing the more positive sentiment from the Philly Fed business survey, which historically has mirrored the yield curve’s signals just before a recession.
To gauge the likelihood of a recession, Foresight Analytics emphasizes the importance of monitoring financial conditions. Beyond the Fed funds rate and the yield curve, credit spreads and equity prices play crucial roles. Despite the bond market’s anticipation of rate cuts, credit spreads remain stable, and equities are not deemed excessively expensive. This analysis underscores the complex interplay of factors influencing financial conditions.
Market Insights: Equities, Credit Spreads, and Earnings Forecasts
Delving into market dynamics, Foresight Analytics navigates through the intricate relationship between bond yields, credit spreads, and equity returns.
While the bond yields are not perceived as a direct threat to equity returns, the spectre of a US recession looms large.
The historical precedent of equities experiencing a substantial drawdown during recessions is a cautionary note, especially when analysts project an 11% increase in earnings.
Equity investors are advised to exercise caution, considering the prevailing uncertainty. Foresight Analytics highlights the vulnerability of high-yield credit spreads, emphasizing the potential for sharp widening under risk-off conditions.
Predictive Modeling and Asset Allocation Strategies
The analysis culminates in a forward-looking assessment, leveraging predictive modelling to evaluate the likely returns of various equity markets.
- Japan emerges as the preferred market, following a period of underperformance.
- Europe, despite recent strength, is deemed less attractive.
- The US, while historically expensive, remains a contender if earnings align with analyst forecasts.
- Australia is unattractive because it is overvalued and has had a run of downgrades during the past 2 years. The market was upgraded in December and January, but it’s too early to tell whether this is a sustainable change in direction.
In the realm of defensive assets, Foresight Analytics adjusts its allocations, shifting towards Australian government bonds and maintaining an overweight position in global government bonds.
An intriguing move is noted with a small overweight in infrastructure, anticipating its resilience amid slowing growth and eventual rate cuts.
Longer-Term Digital Mega-trends
Once the inflation problem is solved and the risk of recession has passed, we think the US will be the world’s leading market. This is still some way off, but we like the evolution of AI, Digital Leisure, Infrastructure and fossil fuels, and Internet-driven business. The US market offers the best-developed market exposure to these longer-term Digital thematics.
Outlook for Real Assets and the Global Economic Landscape
In the realm of listed property and infrastructure assets, Foresight Analytics emphasises the pivotal role of their modelling techniques in evaluating similar unlisted real assets.
The preference for unlisted infrastructure over unlisted property and alternative assets such as private debt and hedge fund strategies is driven by the negative correlation of their returns with listed markets, showcasing their utility in uncertain economic environments.
The Australian Dollar
The Australian dollar, a barometer often closely watched, historically tends to trade below $US0.60 just before and during a global recession.
Foresight Analytics notes a deviation in the current pricing, suggesting that the risk of a US recession might not be fully factored in.
The Australian dollar, presently trading around $US0.67, has lost ground since the end of 2023. While within the fair value range, potential fluctuations are expected, especially if the Q4 23 CPI influences the Reserve Bank of Australia (RBA) to raise rates.
Geopolitics A Risk
The prospect of geopolitical risks, particularly the Israel-Hamas conflict, introduces an additional layer of complexity. Escalation in geopolitical tensions can impact yields and influence global growth dynamics. Moreover, short-term outlook indicators suggest positive momentum, with the ratio of new orders to inventories indicating a potential upswing in the manufacturing ISM.
Australian Sovereign Bonds 2024
Turning our focus to the Australian sovereign bonds in 2024, Foresight Analytics takes note of inflation trends.
Australia’s inflation rate, notably higher than many advanced economies, poses considerations for the RBA.
House prices are again rising briskly in most capital city markets due at least in part to limited supply and strong population growth, but the pace of growth is solid enough to suggest that the economy can absorb another rate rise if needed. However, the Government is slowing population growth and this will create downside risks to growth, particularly in H2 24.
Building approvals have been slowly recovering since May and are now increasing by 13,800 per month in trend terms. This is well below the April 2021 peak of around 21k per month but it has been steadily increasing from the trough in May 2023 nonetheless.
While economic indicators signal both potential upsides and downsides, Foresight Analytics recommends a slight overweight in global and Australian sovereign bonds as a prudent measure to position for recession risks.
In conclusion, the intricacies of the economic landscape and the global market are complex and dynamic.
Foresight Analytics provides a nuanced perspective backed by rigorous modelling and analysis.
For more in-depth insights on the global economic outlook for 2024 and to stay informed about the evolving economic landscape, explore Foresight Analytics’ complete whitepaper.
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