Executive summary

Key points

• The world is as uncertain, if not more, as it was this time last year. Anticipating what will happen next is an ever more challenging task
• We continue to believe that the whole “recession debate” is misplaced. A repeat of a 2008-type near collapse of developed economies is unlikely
• Recession or not, what really matters is how stocks, bonds, commodities, and real assets will react to the future macro- and micro-economic developments
• While we do expect a world where economic growth trends lower, sometimes flirting with contraction, we also expect inflationary pressures to recede, albeit gradually
• A well-planned and appropriately diversified portfolio remains a robust financial planning tool over the long term.

As we look ahead to 2024, the temptation was high to just repeat the investment strategy we laid out back in our June Mid-Year Outlook. The world is as uncertain, if not more, as it was then and anticipating what will happen next is an ever more challenging task.

Recession 2.0

The most anticipated recession in history is still nowhere to be seen. Simply because it didn’t happen in 2023, many investors are now expecting it in 2024. While each day passing brings us closer to the next economic contraction, we continue to believe that the whole “recession debate” is misplaced.

First, there’s the misconception in most people’s mind that a recession is what we experienced in 2008 and brings a near collapse of developed economies. If this is what a recession looks like, then we can convincingly say that we still do not expect one in 2024. 

Second, it’s worth remembering that we, as investors, are in the business of selecting the optimal combinations of assets that could deliver the most attractive risk-adjusted returns over the medium term. We do not go long or short the GDP of a country or a region. This is why, recession or not, what really matters is how stocks, bonds, commodities, and real assets will react to the future macro- and micro-economic developments.

Lower growth and lower inflation

What we do expect is a world where economic growth trends lower, sometimes flirting with contraction. With that, we also expect inflationary pressures to recede, albeit gradually from here. With main central banks having been extremely aggressive in their pursuit of higher interest rates, we would expect them to change tack as the year progresses (given expectations of falling inflation). However, investors should be careful what they wish for: monetary policy may not turn accommodative unless the outlook meaningfully deteriorates. 

This environment may not seem conducive to attractive investment opportunities, but we see plenty. Of course, the road ahead won’t be plain sailing and setbacks are likely. In addition, risks appear tilted to the downside as the “long and variable” lags of tighter monetary policies have yet to filter through. This is why, in 2024, investors’ resolve will likely be tested once again. 

Looking in and looking out

While the main risks that come to mind when thinking about the next 12 months are macroeconomic or geopolitical, investors often underestimate two other sources of possibly even greater risk. The first is the risk from within and how detrimental investor psychology can be. The second is the risk staring us in the face: climate change. The successful investor will have to consider both of these risks in 2024 and beyond. 

Playing defence

Cash is now a comforting and arguably rewarding alternative. However, it’s unlikely to be the long-term answer to meeting one’s investing goals. Instead, a well-planned and appropriately diversified portfolio should allow both the dampening of short-term volatility, and the maximising of potential risk-adjusted returns. While this message may sound familiar to our readers, the make-up of said portfolio should be adjusted to reflect the current backdrop. 

While 2023 was about locking in yields, 2024 could be about extending (fixed income) duration to capture more than just coupons until maturity. Similarly, equity investors would need to tweak their allocation to favour sectors and regions that can respond well when growth slows and rates start falling. Beyond stocks and bonds, investors will also need to be creative and tactical. Option strategies could be a very useful tool for improving the risk-reward profiles of investment in 2024. Finally, private markets and hedge funds could allow portfolios to benefit from sources of returns that are less directional and less correlated than traditional asset classes.