The world heads to the polls
Capital markets brought their customary set of surprises in 2023. With the exception of China, nearly all the world’s stock and bond markets closed the year deep in positive territory, despite central banks hiking key interest rates at an unprecedented pace. This paradoxical enthusiasm stems largely from inflation gradually cooling off, fuelling investors’ hopes that monetary policy might be eased on a similar scale. This has been compounded by global economic growth – particularly in the US – which has proved stronger than expected at the beginning of the year[1] and by the craze around artificial intelligence (AI), which propelled the technology rally.
The positive news has now been factored in and will no longer have much effect on market prices in the near-term. So, what surprises could impact capital markets in 2024?
The key factor could be the pace of the expected policy pivot. When it begins and the extent of the easing are still unknown. As we enter 2024, most investors are expecting the US Federal Reserve and the European Central Bank to lower their rates by 25 basis points as soon as the end of the first quarter; this first cut is likely to be followed by 4 or 5 further cuts over the course of the year.
These scenarios could, however, be threatened by unexpected shifts in inflation, or more importantly, growth trends. In the United States, market forecasts are moderately optimistic. Growth estimates currently stand at around 1.30% and have been regularly revised upward over the past few weeks[2]. In the Euro zone, however, gloom prevails: current growth forecasts of 0.5% have been consistently revised downward since the summer[3]. And these might still be over-optimistic.
Another crucial factor for the global economy will be the pace of Chinese growth, expected at 4.5%. This is the lowest in recent decades, other than during the economic shutdown due to Covid in 2020 and 2022. With China’s property crisis still lingering, these already weak estimates seem particularly fragile.
We are in no doubt that “pools” of potential positive surprises subsist. An AI-enabled rebound in productivity is on the cards. Or economic growth supported by an abundant supply of oil and gas, notably from the United States, as was the case in 2023. Or, why not, a much awaited rebound in China’s property market, bolstered by the plethora of government stimulus measures.
As far as risks are concerned, geopolitical factors take pride of place. The conflicts in Ukraine and in the Middle East could intensify. China could be tempted to move its pawns in Taiwan… and North Korea could escalate its provocations. “Plain politics” could also have a significant impact on the economy and markets. More than half of the world’s population will go to the polls this year: In Russia, Iran, Mexico, Indonesia, the United Kingdom, India, the European Union… and importantly, in the United States, all scenarios are feasible, even the most far-fetched.
Faced with these possibilities, our convictions are clear. First, disinflation will continue. This will benefit bond markets in particular, which still offer an attractive carry yield. Private credit will remain one of our top choices, as it has been over the past few quarters. Any form of slowdown could accelerate the easing of central bank rate policies, fuelling an extension of multiples across equity markets. And while US large caps are admittedly trading slightly above their average, other segments of the global stock market, notably in Europe, still offer valuations that are reasonable – or frankly attractive, in the case of smaller caps.
As always, the future holds great opportunities. But it seems safe to say that the best investments will be found outside of the 2023 favourites, which have already factored in so much positive news.