Home Brokerage Five Important Investment Themes for 2024

Five Important Investment Themes for 2024

by internationalbanker

By Joseph Moss, International Banker

 

  1. Declining interest rates

With inflation declining worldwide in early 2024, central banks are expected to begin cutting their policy rates at some point this year. Indeed, their holding rates unchanged in recent months suggests that rate-hike cycles have ended. When exactly the first rate cut materialises, however, is far from set in stone, particularly as inflation has yet to reach most central banks’ formal targets. As for the United States, Goldman Sachs stated it envisaged the Federal Reserve (the Fed) cutting the federal funds rate (FFR) five times during its eight scheduled meetings during 2024, with this benchmark rate lowered for the first time during the Federal Open Market Committee’s (FOMC’s) March 19-20 meeting.

Assuming each cut is 25 basis points, the federal funds rate would drop from 5.25-5.50 percent to 4.00-4.25 percent. “The Fed will start cutting the funds rate soon, most likely in March. After all, Chair Powell said at the December 13 press conference that the committee would want to cut ‘well before’ inflation falls to 2%,” Goldman economist Jan Hatzius wrote in a research note. “However, we expect ‘only’ five cuts this year, below the six-to-seven cuts now discounted in market pricing, and we view the chance of 50 basis points steps as low.”

  1. Soft economic landings

Although not guaranteed, analysts are increasingly confident that the US can avoid a recession and successfully engineer a soft economic landing this year. That said, growth is still expected to cool during the coming quarters. While the US economy has been resilient so far, Standard Chartered noted that it had observed some signs of a deceleration. “The good news is the US Federal Reserve has indicated a willingness to ease policy earlier than anybody expected. This is likely to increase hopes of an economic soft landing, especially with the inventory cycle becoming increasingly supportive and the labour market remaining tight,” the bank’s chief investment officer, Steve Brice, wrote on January 11. “Elsewhere, China’s economy is likely to stabilise in response to 2023’s policy stimulus. Meanwhile, Europe is already teetering on the brink of recession and is unlikely to improve dramatically in 2024.”

Nonetheless, investors should not ignore the fallout of the highest interest rates since 2007 and the lag effects inflicted on many aspects of the global economy throughout 2024. According to BNP Paribas, “huge lagged knock-on effects” will be observed in areas such as real-estate prices and corporate-investment levels, as well as savings with high returns not seen since the Global Financial Crisis (GFC). “The impact of far higher interest rates has not yet been fully reflected in (lower) economic growth and inflation rates, above all in the US,” the French bank’s asset-management unit noted in mid-December. “Moreover, central banks continue to repeat their mantra of ‘higher for longer’, suggesting that they will not reduce interest rates until they are convinced that inflation will not flare up anew.”

  1. Artificial intelligence

2023 was a monumental year for artificial intelligence (AI), not least thanks to generative AI (GenAI) applications such as ChatGPT, which led to a massive wave of use cases and experiments to test the technology. According to Gartner, the buzz over generative AI triggered global demand that was “barely fulfilled” by the growth in software-provider numbers, while McKinsey & Company described 2023 as the technology’s breakout year. “Less than a year after many of these tools debuted, one-third of our survey respondents say their organizations are using gen AI regularly in at least one business function,” the consulting firm noted in August, having surveyed 1,684 participants at all levels of organisations in North America. McKinsey also found that 40 percent of survey respondents expected to increase their investments in AI overall because of advances in generative AI.

2024 is expected to see further maturation of generative AI alongside continued growth in the deployments of other AI-powered applications. “AI is much larger than GenAI, and many organizations now seem ready to explore the full spectrum of AI techniques and practices,” Gartner recently noted, adding that it expects 2024 to be the year when “a large number of new entrants will realize that while AI’s power frees them from a disciplined and rigorous approach to deploy and maintain AI systems, it will be the most adventurous organizations that follow a disciplined approach who turn AI into a game changer”.

  1. Geopolitical risks

The year has already gotten off to a fiery start, with the war in Gaza having expanded to a wider regional conflict that has drawn in Yemen, the United States and the United Kingdom and instigated attacks by various actors in Lebanon, Syria, Iran and Iraq. With Yemen responding to Tel Aviv’s ongoing military assault by cutting off shipping routes in the Bab el-Mandeb Strait to vessels headed for Israel, the impacts on economic growth and inflation for the various parties concerned could be substantial.

Indeed, 12 to 15 percent of global trade heads through the Red Sea via the Bab el-Mandeb Strait. “Relative to what would have happened otherwise, we will see higher inflation, higher mortgage rates and lower growth,” Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser at Allianz, told the BBC on January 15. “In absolute terms, however, it is nothing compared to what we had in 2021 and 2022. This shock is not going to be as big, but it is unfortunate.”

Besides the continuation of such conflicts, 2024 will be a hugely important year for democracy worldwide, with voters in the US, India, Indonesia, Mexico, the European Union (EU) and the UK heading to the polls to cast their ballots in their respective general elections. Signs are increasingly pointing to a second Donald J. Trump presidency materialising in November’s US presidential elections, for instance, and the implications could be hugely significant. UBS recently noted that such an outcome “is likely to lead to higher uncertainty in geopolitics, including US-China relations”.

And with Lai Ching-te from the ruling Democratic Progressive Party (DPP) winning the recently concluded Taiwan election, those relations will likely continue to be tested throughout the year. Despite 182 of the 193 United Nations (UN) member states currently recognising Taiwan as part of China, tensions could flare up this year as the largely pro-separatist DPP—already handsomely backed by the US-led West with several provocative rounds of military support—continues to antagonise Beijing. The consequences of this standoff could include further trade-war escalations, additional economic sanctions levied by both China and the US against each other, and expedited decoupling and friendshoring.

  1. Sustainability

Arguably, the key takeaway from the recent United Nations Climate Change Conference (COP28) held from November 30 to December 12 in Dubai, United Arab Emirates (UAE)—to some, a controversial location—was that the world is not doing enough to meet global climate targets. This year may see investors increasingly prioritise the transition away from fossil fuels and other environmentally harmful investments towards the expanding suite of sustainable-investing options now offered by financial firms. And with 2023 set to go down as the hottest year ever recorded, that transition may be steep.

Companies will also likely respond to this glaringly underwhelming progress with their own accelerated transitions, aligning themselves more stringently with global climate goals. MSCI Research found that an orderly transition, “fuelled by forceful government policies introduced in short order”, will prevent the loss of almost $8 trillion in listed companies’ market values compared to a disorderly one in which decarbonisation stalls into the early 2030s.

The investment firm’s analysis, published on December 13, moreover, highlighted real-estate investors as being among the most significantly impacted, thanks mainly to the physical damages incurred by changing weather patterns and the costs of transitioning to low-carbon economies. As such, 5.5 percent of the MSCI Global Annual Property Index could be vulnerable to transition risks and 3.0 percent to physical risks over the coming decades, the MSCI estimated, while insurance costs will also surge due to more frequent and severe weather patterns.

“A fossil-free economy means that a majority [of] companies need to reimagine their business models in some significant way to align with the path mapped out in Dubai,” observed Oliver Marchand, an MSCI managing director. “Two hundred countries have just sent a message that companies will need to change the products they sell or the methods of production or suppliers they use if society is to translate the agreement reached at COP28 into action. Investors may increasingly need to be able to identify climate leaders in every industry as they sharpen their view of the transition.”

 

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