The global economy surpassed even optimistic expectations in 2023 and the tough times are behind us, predicts Goldman Sachs. The investment bank begins the cycle of strategy reports for 2024 with the long-term report and the 10 investment topics that will shape market returns in 2024.
“We recently presented the global macroeconomic outlook for 2024, where we estimated that the hard part is over. On the outlook for global markets, highlighting as usual the 10 key investment themes that drive many of our views on the market.
The 10 investment themes are as follows:
1. THE inflation approaching the target. There is no imminent US recession, but markets are already priced for a soft landing. Inflation is within touching distance of target in all developed countries and there is no immediate risk of a recession in the US. The problem is that this view is already reflected in market valuations.
2. THE pandemic it was the latest blow to lower yields and low inflation after the global financial crisis (GFC). The picture is that we have escaped the liquidity trap, “low inflation” and low yields. A more normal investment environment than the post-GFC period, with positive real returns across all asset classes, is underway.
3. Deflation is expected to continue, even if it is more ‘abnormal’ in places. This opens the door for a friendlier one Fed which will respond to the weakness of development. Inflation has to allow for that, and that can take time.
4. Global development in the central scenario. The resilience of US growth to high interest rates appears to be more “certain” than elsewhere. China has not “disconnected” from it Russian energy, China’s demand may have a greater impact on Europe. Sustaining dollar weakness is more difficult without greater strength elsewhere.
5. Higher interest rates are justified in the US, but the question is whether the rest of the world can afford them. European sovereign rifts are re-emerging, as are emerging market (EM) sovereign woes. The highest interest rates and a strong dollar complicate policy choices for Japan and China. In the US, fiscal concerns may intensify with the election season.
6. Higher yields improve the value of bonds. The pricing of forward rates and curves is less inverted, so less vulnerable now. The shift from inflation shocks to growth shocks improves the correlation with stocks and bond portfolio value. As demonstrated in March, bonds provide a (cheap) hedge against recession.
7. Start for the carry trades. The overall returns are high, but the spreads they are narrower in carry assets. Combine carries in corporate bonds, EMs, commodities with uptrends or downtrends. Modest rise in spot oil, but exposure to geopolitical escalation or supply disruption. The Chinese Yuan or the Mexican peso provide a good carry trade. The volatility of US interest rates is still very high and mortgages offer.
8. Finding the right kind of “performance” for the shares. Cash yields remain a high hurdle, but falling inflation and steady interest rates make for a better backdrop for stocks than this year. Outside of US megacaps, earnings yields look less stretched historically and have improved. Undervalued cyclical companies may be rewarded if global growth picks up. In a world of higher prices for longer, companies with strong balance sheets and larger companies may continue to outperform.
9. Emerging markets – the limits of outperformance. EM resilience/outperformance is impressive given the US interest rate situation and lower growth in China. As a result, it is now reaching valuation constraints. There are still selective opportunities of relative value.
10. Balancing portfolios. The main asset classes cover the risks. Non-recessionary Fed cuts earlier in the year could open up significant upside in all risk assets such as stocks and EMs. Bonds offer ways to hedge against recession risk, and the risk of disruption makes commodities attractive. The motto for 2024 is “balanced exposure to all assets, not just cash,” concludes Goldman Sachs.
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