Our investment outlook for May 2024

This article was written by Thomas Becket and originally published by CGWM. 

Can investment opportunities accelerate during economic deceleration?

In our first client webinar at the beginning of 2024, we shared our predictions for the economy and markets for the year ahead, and their likely impact on client portfolios. In our forecast we suggested that:

• The US economy would slow, but other parts of the world, most notably China, could improve
• The global economy would avoid a recession
• The slower rate of growth in the US would contribute to a period of disinflation, where price rises would slow, rather than falling outright
• Central banks across the developed world would start reversing the recent aggressive acceleration of interest rates
• This broad backdrop would be healthy for markets and portfolios, and both equities and fixed income investments could make a positive return in 2024.

Pleasingly, although it is still relatively early in the year, the last of our forecasts has already come to fruition, with both equities and our favoured areas of fixed income investing notching up positive returns.

Our most important prediction was that the economy and markets would decelerate considerably – which may come as a surprise after the way asset prices rallied in the last few months of 2023, providing temporary relief.

However, we believe this deceleration is a positive and key reason why our client portfolios can make further progress. Although they went through a volatile period in 2022 and 2023, as discussed above, they are now building on the recovery in equity and bond markets (Fig 1). This recovery started 18 months ago, following the nadir in many asset prices after the mini budget in September 2022.

Fig 1 – Global equity and bond performance since the September 2022 mini budget 

Source: CGWM, Bloomberg

How likely is a global recession?

Making economic predictions for the world is currently challenging, for three reasons:

1. COVID-19 and the monetary and fiscal responses to that situation have made all previous models for predicting future economic movements irrelevant  
2. The correlation between the economic direction of the US, Europe and China has broken down in recent years
3. Various parts of individual economies are oscillating on different wavelengths - the clearest evidence for this is coming from the US, where consumer activity has been booming in recent years, while manufacturing and housing have laboured.

So far this year, all three of these economic factors have continued to muddy the water, although while Europe and China have been bordering on recession, the US continues to grow, so our predictions are still sensible. There are now some signs that Europe and Asia are improving, even as parts of the US economy are starting to slow - and we believe the global economy should avoid a recession this year, even if the path ahead is a little bumpy.

Is a fall in inflation still possible?

Inflation has been a concern for markets this year, with the falls in overall rates starting to slow and certain pockets of inflation proving stubbornly persistent.

There is still uncertainty about the rising costs of housing, wages and commodities. Costs are also rising within the booming services sector, fuelled by healthy consumer demand. Our interpretation of the latest inflation figures is that rates are still falling, but there may be some nerves in the coming months and quarters.

Predicting inflationary waves is not an exact science, but we will be on the lookout for a second round of inflation in the year(s) ahead, as this is often the case after inflationary episodes. This approach has also been reflected in both the behaviour of central banks and the pricing of future interest rates in the industrialised world.

When will interest rates likely subside and by how many increments?

At the end of 2023, the markets’ central expectation for the next 12 months was that we would see between six and seven 0.25% interest rate cuts in the US (and similar trajectories in the UK and Europe). However, as the latest data on the economy and inflation has been revealed, the number of cuts expected has fallen to between one and two in 2024, with the first cut likely to happen in the late summer. This makes sense and is much closer to what we have always predicted.

The early pricing of those cuts in the last few months of 2023 helped markets recover by the year end, so the real question is: why have markets not taken this revision badly? We think there are several answers:

1. Economic activity has been solid, boosting expectations for corporate profits, which drive share prices and reduces the likelihood of corporate defaults, supporting the case for investment in corporate bonds
2. Although it’s proving difficult to get the rate down to the central banks’ 2% target, investors seem to believe that inflationary pressures are receding
3. We might not get as many interest rate cuts as quickly as previously forecast, but the next move will almost certainly be lower; the timing has been challenging, but the direction is clear.

In conclusion, while we can all be comforted by the fact that portfolios and markets have enjoyed a calm start to 2024, it’s difficult to predict the future. So we remain open-minded, balanced in terms of asset allocation, and diversified at an investment level to ensure the best outcomes for our client portfolios.

Any questions?

If you have any questions about the current market and economic environment or your asset allocation within your portfolio, please get in touch with us.

For further information on any of the terms used in this article please see our glossary of investment terms.

Premier league portfolio management: applying attack and defence tactics

Just like a successful football team, your investment portfolio sometimes needs to defend your wealth solidly against market uncertainty, and sometimes it needs to be more aggressive to generate better returns. Discover why we believe right now it should do both.

Discover our accompanying article to Investment Outlook May 2024.

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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

This is not a recommendation to invest or disinvest in any of the companies, themes or sectors mentioned. They are included for illustrative purposes only.

The information contained herein is based on materials and sources deemed to be reliable; however, Adam & Company makes no representation or warranty, either express or implied, to the accuracy, completeness or reliability of this information. Adam & Company is not liable for the content and accuracy of the opinions and information provided by external contributors. All stated opinions and estimates in this article are subject to change without notice and Adam & Company is under no obligation to update the information.