Invesco releases 2024 Investment Outlook “The Balancing Act”

• Predict that the long and variable lags of monetary policy will likely result in continued disinflation, with an economic slowdown in 1H followed by an economic recovery in 2H.
• Chinese authorities expected to marginally expand fiscal policy over the year to stabilize growth rates estimate real growth of around 4.3-4.7% year-on-year.
• Risk appetite to improve but uncertainty around potential rate cuts could drive volatility, presenting opportunities for long duration fixed income exposure. 
• Primary risks are geopolitics, commodity shocks and financial accidents.

Hong Kong, 8 December 2023 – Invesco today released its 2024 Investment Outlook (link) with insights on the near-term expectation for global markets through the remainder of the year. 

After nearly two years of policymakers fighting inflation, the Outlook focuses on the balance between growth durability versus the stickiness of inflation. The long and variable lags of monetary policy are anticipated to result in continued disinflation in the coming year, with an economic slowdown in the first half followed by an economic recovery in the second half of 2024.

Despite rapid policy tightening over the course of 2022 and 2023, many developed economies have continued to grow and have only recently begun to show signs of strain. Over 2024, we expect outcomes will vary by country—the US appears most resilient to the effects of tightening policy and financial conditions, while growth in the Eurozone and United Kingdom is already flagging. Restrictive policy, increasingly stretched consumers, and idiosyncratic growth shocks suggest that growth is likely to continue to slow over the near term.  

Moving into 2024, the global economy is expected to slow marginally, with a bumpy landing for major developed economies materializing in the first half of the year. The slowdown should be shortened by a turn to easing monetary policy as inflation gradually subsides. Moving forward, real wage growth in major developed economies is expected to resume as inflation normalizes, helping to support a return to trend growth.

Kristina Hooper, Chief Global Market Strategist at Invesco, commented: “We believe monetary policymakers have now reached the ends of their tightening cycles. The next step is likely to be easing for major central banks in Western developed economies, likely emerging late in the first half of 2024 as growth slows and inflation continues to move towards acceptable rates. This should help a recovery to take shape, returning the global economy toward trend growth in the second half of the year.”

The Chinese economy, meanwhile, is in a remarkably different position. Policymakers are seeking to stabilize growth after optimism around its post-covid opening was tempered in 2023. Chinese growth in the first half of 2024 is likely to be subdued, though likely to improve in the second half, resulting in a year-over-year real growth of around 4.3 to 4.7%. Moving forward, Chinese authorities are expected to marginally expand fiscal policy over the year to stabilize growth rates.

Japan is also in a very different place than other large economies. The Bank of Japan (BOJ) is likely to continue to hold back on material tightening because there are significant uncertainties over the sustainability of rising inflation. Nonetheless, the Outlook expects the BOJ will likely start tightening monetary policy marginally during the first half of 2024, and further expects that the Bank will likely tweak its yield curve management policy to prevent knock-on effects from outsized increases in volatility in global bond markets.

Kristina added: “In contrast to the large Western economies, Chinese policy is already firmly in accommodative mode as policymakers look to stabilize growth, and in Japan, the BoJ may embark on monetary policy tightening in 2024 even as it continues to hold an accommodative policy stance. There remains a modest left-tail risk of significantly higher inflation, which may force the BOJ to tighten more significantly than markets expect. This could drag up global bond yields and strengthen the JPY.” 

Risk appetite likely to improve as markets discount a recovery in the second half

The Outlook anticipates that risk appetite will continue to improve as markets discount a recovery in the second half of 2024. However, given that some policy uncertainty will remain around the timing of when rate cuts begin, there could be some volatility early in the year, which may present opportunities for pursuing long duration fixed income exposure. 

The primary risks to markets in 2024 are geopolitics, commodity shocks and financial accidents. Since the global pandemic began to recede in 2022, risks and uncertainty have remained elevated. Conflicts in Ukraine and the Middle East have introduced greater uncertainty for global markets, supply chains and prices, with effects on consumption and trade; another commodity price shock is still possible.

Domestic political uncertainty in the US has also exacerbated concerns about the country’s fiscal sustainability, with potential for further government shutdowns and even the possibility of default. Meanwhile, the rapid tightening of credit conditions across many major economies has raised fears about potential financial accidents, such as those witnessed in the first half of 2023.

Potential alternative paths for the global economy

The Outlook analyses two alternative potential scenarios that similarly focus on the balancing act between growth and inflation and resulting reactions from policymakers.

In the Outlook’s downside scenario, one of two drivers may result in a “hard landing”: an already-committed policy mistake, or persistent inflation that spurs more tightening. The long and variable lags of policy tightening from 2023 may prove too much for the economy to handle in 2024, leading to far weaker growth and faster disinflation. Conversely, more persistent inflation would require policymakers to keep rates higher for longer, which would also seriously weaken economic growth.  

In the Outlook’s upside scenario, supply-side shocks in the US dissipate or are already gone, and mild cooling on the demand-side enables inflation to ease. In this “soft landing”, the economy experiences a very mild mid-cycle slowdown that it quickly exits. Core inflation would fall with more certainty and more smoothly, enabling the Fed to ease sooner. This could be positive for surplus economies like the Eurozone, Japan and China, as well as twin-deficit emerging markets. 

Kristina commented: “Although the investment implications are similar for both hard landing scenarios, a hard landing from a policy mistake would be more beneficial for long duration bonds and equities, but these assets would underperform if inflation remains persistent. A soft landing would, conversely, help offset generally weaker growth in China and the Eurozone. This is the kind of market with a high degree of uncertainty, so investment diversification is as important as ever.”

Favored Asset Classes

In the Outlook’s base case scenario, global risk appetite is anticipated to increase as the year begins, and this environment should favor equities although fixed income is also poised to perform well given the likelihood of falling rates. 

Within equities, the greatest potential is in emerging markets, although developed market equities outside the US also appear attractive. Value, cyclical and small cap stocks are anticipated to outperform in the first half of 2024. In terms of sectors, consumer discretionary and technology are preferred. Consumer discretionary in particular is closely correlated with the economic cycle, so an economic recovery would be positive for this sector, especially as consumers are benefiting from low unemployment.  

Within fixed income, given short term concerns about decelerating economies and the prospect of falling rates, high quality credit should be favored. Long duration is also compelling; based on historical precedent, this is an attractive time to lock in rates on the long end of the curve. The US dollar is expected to ease as markets anticipate rate cuts by the Fed, which should benefit emerging market local currency debt.

Other asset classes to consider include direct lending, given the asset class’s current high yields, floating-rate nature, and favorable lender terms and protections. Commercial real estate lending may also provide access to real asset markets; though higher interest rates may pressure real estate assets, fundamentals are improving as there are pockets of strength in various sectors and markets. Finally, given the increase in geopolitical risks, gold could have periods of strong performance. 

About Invesco

Invesco Ltd. (NYSE: IVZ) is a global independent investment management firm dedicated to delivering an investment experience that helps people get more out of life. With offices in more than 20 countries, our distinctive investment teams deliver a comprehensive range of active, passive and alternative investment capabilities. For more information, visit www.invesco.com.

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