Outlook 2024: our scorecard

Please note: This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below.

All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points

• With US growth slowing to 3% in the twelve months to June, events have vindicated our belief last year that the recession debate raging at the time seemed to be misplaced. 
• The belief that a defensive strategy was warranted has proved to be partially correct. While utilities have outperformed, consumer staples have been more challenged. In fixed income, locking in yields at 5% was justified.
• The downside risks of worsening credit quality, a sovereign debt crisis, an inflation shock or a an unexpected curve ball has been justified in part. Inflation continues to trend lower and no curve ball has been seen yet.
• Our end-year Outlooks are designed to tune out the noise and build a ‘base case’ scenario, while guiding investors through the following twelve months and stopping them from taking unnecessary risks. Our Outlook 2025 is published in November.

Next month we’ll publish our Outlook 2025. As such, this seems an appropriate time to take stock of the macroeconomic landscape, reflect on how financial markets have evolved over the last 12 months and assess what we got right, but also what we got wrong.

The big picture: A

Last October, we thought that 2024 should be a year of “lower growth, lower inflation and lower rates”. 

We argued “that the whole recession debate was misplaced” (see Executive summary). This seems to have been the right call. Between the third quarter of 2023 and the second quarter of 2024, and according to the most recent available data at the time of writing, US gross domestic product (GDP) growth cooled from 4.9% year-on-year (Y/Y) to 3.0%.  

On the other hand, in the UK and the eurozone growth accelerated modestly. This is something we flagged as the result of a low base. In China, another key driver of global growth, GDP cooled from 4.9% to 4.7%. 

Overall, we got the direction right, although the resilience of the US economy was a surprise.

At the time of publishing our last Outlook, US headline inflation was 3.2% Y/Y. It was 4.6% in the UK and 2.9% in the eurozone. Fast forward to today and these numbers are 2.5%, 2.2% and 2.2%, respectively. This is an easy pass, although it’s true that core inflation has remained stickier.

Finally on rates, the US Federal Reserve, the Bank of England and the European Central Bank have all cut interest rates in 2024. This is a pass. Even when looking at longer-dated government bonds, their yields have fallen: the US 10-year Treasury yield went from close to 5% in October 2023 to around 3.8% at the time of writing. Again, we would award a solid grade here. 

Playing defence: B 

Another key tenet of our year-ahead publication was the concept of ‘playing defence’. Indeed, we favoured more resilient sectors within equity market, and saw limited benefit in reaching for risk within credit, instead maintaining a preference for investment grade compared to high yield. While utilities are the best performing sector in the US and on the podium globally so far this year, consumer staples have been more challenged.

Within fixed income markets, the high yield segment outperformed expectations as spreads tightened even further. As such, it was justified to ‘lock in yields’ back when the US 10-year bond was 5%. Similarly, subordinated bank debt and BB bonds, two areas we have been constructive on, have delivered decent outperformance. Finally, holding bonds served a purpose both in terms of their contribution to portfolio return and diversification benefits.

Maintaining composure: A+ 

Throughout the Outlook 2024 we kept reinforcing the message that this year would be testing for investors and that maintaining composure was essential. August’s growth scare was exactly what had been in mind (although we acknowledge that we didn’t predict it). In just three weeks, global stocks lost 8% peak-to-trough, before recovering all the ground lost over a similar period of time. Anybody who sold during this period of financial stress left money on the table.

Possible risks: C+

In the ‘What could go wrong, or right?’ section, we highlighted four possible downside risks to our central scenario: worsening credit quality, a sovereign debt crisis, another inflationary shock and a curve ball. While the US commercial real estate sector is struggling, and the spread between the cost of French and German debt shot up after President Macron called a snap election, these weren’t enough to scare financial markets. 

Inflation has had ups and downs, but continued to trend lower and no curve ball has been thrown (yet). So, while a good grade can’t be awarded here, comfort is taken in the fact that none of the risks identified has materialised.  

Overall grade: A-

We don’t pretend to be able to predict the future. Our aim is to tune out the noise, build a reasonable ‘base case’ scenario, and share insights with investors through an ever-changing macroeconomic landscape, while identifying opportunities and unnecessary risks. 

On this, and considering our readers’ sympathy, we believe a B+ if not an A-, is deserved. Importantly, there is still room for improvement, which we aim to achieve in the Outlook 2025.