The ubiquity of uncertainty and long-term investment opportunities

Sluggish economic growth, a volatile geopolitical backdrop and apprehension over the eventual outcome of the looming US Presidential election have collectively conspired to give investors much pause for thought.

Key points discussed below:

The World Bank recently added to the anxiety when it forecast that the global economy is on track to deliver its weakest half-decade performance in 30 years, with trade growth predicted to be half the average in the decade prior to the pandemic.1

Notwithstanding the myriad of issues the world presently faces, we believe there is plenty investors can take solace from. Interest rates look like they have peaked, bond markets are in better shape and equities continue to roar ahead. Even the World Bank has acknowledged the global economy – despite its challenges - is in a better place than it was a year ago as the risk of recession has at least receded. Many indicators suggest that 2023 saw the trough in the global cycle. Investors need to be forward looking and there are some encouraging signs.

While past performance is not a guide to future returns it’s still worth noting what we’ve witnessed in the first quarter (Q1) of 2024 where a multitude of equity indices have powered ahead. The S&P 500, Nasdaq, Dow Jones, Japan’s Nikkei and Europe Stoxx 600 have all hit fresh highs.2

Within the fixed income space bond yields have risen and as such there continues to be income opportunities in credit, and there is even the potential for bonds to rally when central banks do cut interest rates or if the equity bull market stalls. In addition, high yield continues to enjoy the structural appeal of delivering equity-like total returns but with much less volatility.

Joy driver

While we expect softer global growth in 2024 – before picking up in 2025 - vitally the global economic engine is still moving ahead. The Organisation for Economic Co-operation and Development (OECD) has hiked its 2024 global growth forecast to 2.9%, up from the 2.7% it forecast in November.3

For now, we also predict growth of 2.9% in 2024, rising to 3.1% in 2025. Certainly, there are issues; in the final three months of 2023, the UK slipped into technical recession, while the Eurozone and Japan just avoided it.

In contrast, across Asia, many nations have posted solid GDP numbers, while China, which has its own issues to contend with, still achieved its 2023 target of “around 5.0%” growth. Meanwhile India continues to be a key GDP driver – in 2023 it contributed 16% of the global growth.4

Central to growth of course has been the US which has continued its exceptional run, achieving Q4 economic growth of 3.2% - revised down from an initial estimate of 3.3% - compared to Q3’s 4.9% - but still well ahead of the 2% analysts had predicted.

Grounding the macroeconomic optimism – at least where it has manifested itself – is the prospect of lower interest rates, on the back of broadly easing inflationary pressure, which continues to fall in most economies.

We expect a stickier period to emerge in several economies over the coming quarters, with some upside risks emanating from the continuing conflict in the Middle East but overall, we anticipate that developed central banks will start easing policy from around mid-year. Emerging market central banks have largely started easing but as inflation falls back in line with central bank targets over 2024, this should allow further easing to continue.