Investors’ Outlook: Cut! That’s a wrap

Cut! That’s a wrap

“The year of the bond,” “The year of rate cuts,” “The year of the recession”: 2024 has already been given many monikers. Whichever label investors choose, what’s increasingly clear is that the page has finally been turned on the most aggressive interest-rate hikes in four decades, and the dust is now settling. The new episode has already begun.

Markets see rate cuts as a given, with many investors convinced that the US Federal Reserve has managed to tame inflation without destroying the economy. We continue to believe a recession is coming; the effects of the rapid rate increases are still gnawing their way into the real economy. But we also acknowledge that that window is slowly closing. For one, we’d need to see the US labor market weaken in the next few months. Otherwise, the soft landing scenario becomes more probable.

This also means we’re now moving back to the basics. The days of zero interest-rate policy are long gone. Rates are high enough that there actually is cost of capital, and inflation is higher than zero – so we’ll settle more into a traditional environment where rates may trend lower but there is still a risk-free rate. Economic growth is likely to be more modest, and the expectation for asset prices may be dialed down somewhat. We believe it’s best to stay invested, but stick to defensive and quality names for now. A more cyclical stance may be more appropriate later in the year.

We’re keeping an eye on US commercial real estate as one risk factor that has the potential for a domino effect on capital markets were things to go south. Private market turmoil and geopolitics also remain topics that could spoil the mood, with the risk of the US being drawn deeper into the renewed tension in the Red Sea.

It is also a historical election year, with nearly half of the world’s population casting their votes for their respective country leaders. We’re focusing on the US and what is widely expected to be a rematch between President Joe Biden and Donald Trump, though we wouldn’t say that’s a foregone conclusion just yet, as Republican candidate Nikki Haley could still hold her own and there may be a surprise on the Democrat side too.

In this Investors’ Outlook, you’ll find a deep dive into whether US consumers can continue to provide their forceful boost to the world’s largest economy, our take on what the tensions in the Red Sea may mean for oil, and an analysis by our colleagues in the Conviction Equities Boutique of what Latin America’s catch-up in the digital revolution means for the various industries in the region.

This year is poised to be an eventful one. As an active manager, we always observe the important topics from a bird's eye and a close-up view to guide our decisions and are ready to reposition our camera amid any plot twists 2024 may throw at the world.