Over recent years, we have learned the importance of being prepared for unforeseen circumstances. However, it is reasonable to anticipate that specific well-known topics will prevail in the global financial landscape in 2024.
In this analysis, we delve into the potential developments that could shape the following year for prominent economies, interest rates, and markets.
Threats to the Political System
Amid concerns of escalating unrest in the Middle East and the ongoing Russia-Ukraine conflict approaching its third year, geopolitical challenges have the potential to disrupt markets once again.
The ongoing attacks by Houthi rebels in the Red Sea are causing significant disruptions to shipping, resulting in increased transportation expenses. In order to steer clear of this volatile region, shipping companies are being forced to take longer routes, incorporating thousands of miles into their daily journeys.
Vincent Chaigneau, the research head at Generali Investments, highlights additional factors that could pose risks to the 2024 outlook. These include the potential for the Opec+ oil cartel to limit production even more in order to drive prices higher, a potential decline in support for mainstream parties, and escalating tensions among Beijing and Washington throughout the forthcoming US election campaign, which is anticipated to be a contest between the current president, Joe Biden, and former president Donald Trump.
Elections Under Close Scrutiny
ABN Amro forecasts that declining rates are expected to contribute to a rebound in the future but cautions about potential risks such as the emergence of a second Trump administration, a potential trade dispute between the EU and China, and the possibility of a more chaotic separation between the western countries and China.
This year, elections are happening in several countries that hold significant economic influence, such as India, the European Union, and the UK (unless Rishi Sunak delays until January 2025). However, it is the White House ethnicity that captures the utmost attention of the markets.
According to AJ Bell investment director Russ Mould, studies indicate that the US stock market tends to experience some level of anxiety during the last year of a presidency. However, the Bank of America presents a contrasting view, highlighting a significant 75% increase in the US S&P 500 index during election years.
Allianz Research warns that the extensive election schedule in 2024 will contribute to economic unpredictability. In this particular situation, governments, households, and companies are inclined to take a cautious approach, delaying critical financial decisions.
If Labour emerges victorious in a UK broad election, as surveying has constantly indicated, RBC Wealth Management anticipates that financial markets will not experience a significant adverse response. “The party appears to have shifted towards the center and has significantly strengthened its relationships with the corporate sector,” it states.
A New ‘Roaring 20s’ for Sharing Prices?
The previous year, they concluded with a robust surge in risk assets, as both stocks and bond prices experienced significant gains in November and December. The S&P 500 ended 2023 slightly below its record peak, reaching nearly 4,770 points, with numerous experts anticipating a further ascent in 2024. According to Edward Yardeni, the president of Yardeni Research, his forecast suggests that the index will reach 5,400 points by the end of this year and is expected to continue its upward trajectory, going 6,000 points by the end of 2025.
According to Yardeni, there is a possibility of a significant market rally similar to the “roaring 20s” that occurred a century ago. This optimistic outlook is based on the expectation that consumers will maintain their spending habits and job security, thanks to the impressive cash flow generated by US corporations, which in turn supports the overall US economy.
On the other hand, Mark Haefele, the chief investment officer at UBS Global Wealth Management, foresees the S&P 500 remaining relatively stagnant by the end of 2024, with little change from its starting point. However, he does identify the potential for growth in quality stocks, particularly within the US tech sector.
Last year, Britain’s FTSE 100 index did not perform as well as other major indices. It only saw a modest increase of less than 4%, reaching 7733 points by the end of 2023. In contrast, global markets experienced a significant gain of 20%.
However, the blue-chip index has the potential to recover lost territory. According to a survey conducted among interactive investor customers, 25% of respondents forecasted that the FTSE 100 would surpass 8,000 points by the end of 2024.
According to Simon French, the chief economist at Panmure Gordon, UK companies are currently being undervalued by approximately 19% when compared to their international counterparts. This undervaluation can be attributed, in part, to the uncertainties surrounding Brexit and the sluggish economic outlook of the UK.
Growing Concerns Over a Potential Recession in the UK
There is an anticipated decline in employment, which will result in an increase in the jobless rate to 5% next year and 5.2% in 2025. According to Morgan Stanley, UK inflation is projected to decline further, averaging 2.8% throughout the year. This is a decrease from 3.9% in November, although it remains above the Bank of England’s target of 2%.
Meanwhile, concerns about a potential economic downturn in the UK heightened towards the end of 2023 following the release of revised GDP figures, indicating a slight decline in economic activity from July to September. Morgan Stanley predicts that the UK will experience a slight contraction of 0.1% in 2024, leading to a technical recession with at least two consecutive quarters of negative growth.
Morgan Stanley informed clients that the UK economy is currently in a delicate balance, facing difficulties due to a complex policy combination. Exiting is expected to be challenging – there are indications of a technical recession in the upcoming year and a sluggish economy throughout 2024.
Given the sluggish economy and the deceleration of price increases, investors anticipate that the Bank of England will significantly reduce interest rates in 2024. They are factoring in a decrease to 3.75% by December, down from the current rate of 5.25%. The BoE has vehemently opposed such expectations, consistently emphasizing that it is premature to contemplate reductions.
Homeowners seeking to refinance are already reaping the rewards of the optimistic predictions, as prominent lenders have recently reduced the rates on their fixed-rate offers to below 4% in certain instances.
The Worldwide Perspective: ‘Strong Yet Sluggish’
Oxford Economics predicts that the global economy will achieve a smooth landing, although they note that growth in 2024 may be underwhelming compared to the period after 2008. There is a strong possibility of deceleration due to various factors, such as elevated interest rates and constraints on government spending.
Morgan Stanley forecasts a decrease in global growth for 2024, with a projected rate of 2.8%, compared to the estimated 3% in 2023. In Europe, there are expectations for only a slight increase in growth, with a projected 0.5% in 2024 and 1% in 2025. This reflects the ongoing impact of energy supply disruptions, particularly in Germany, as well as the delayed consequences of strict monetary policies.
It is anticipated that China’s impact on growth in emerging markets will be significant, while its “global downside scenario” envisions a prolonged cycle of debt deflation in China. Widespread defaults in the housing sector trigger this scenario and have the potential to affect other economies as well.
Société Générale perfectly captures the prevailing sentiment in their 2024 Global Economic Outlook report, aptly titled “Resilient but sluggish.” The report is cleverly accompanied by an image of a sloth, symbolizing the slow pace of economic growth.
According to Jim Reid, a strategist at Deutsche Bank, there are predictions that the global economy will come close to experiencing a recession in 2024. Additionally, it is anticipated that the United States will face a relatively mild recession in the first half of the year, with the economy growing by only 0.6% throughout the entire year. Similarly, the eurozone is expected to have a meager expansion of 0.2% in its second year of prolonged stagnation.
Ian Stewart, the chief economist at Deloitte, believes that the United States and Europe will likely navigate their significant inflationary periods without experiencing severe economic downturns.
That would be truly impressive by the standards of the postwar era. Although the situation is still challenging, both businesses and consumers have shown remarkable resilience in dealing with the impact of soaring inflation and interest rates. According to Stewart’s prediction, if central banks are able to orchestrate a smooth transition successfully, we could witness the beginning of a fresh upturn in the economic cycle by 2024.