What’s in store for investors in 2024?
2023 market recap
Despite lots of angst at the start of the year, 2023 turned out far better than feared.
Key big picture themes of relevance for investors were:
1. Stronger than feared growth. Despite fears that recession was inevitable, on the back of multiple rate hikes and a rough reopening in China, it’s been avoided so far, including in Australia, helped by saving buffers, reopening boosts particularly to eating out and travel and some labour hoarding. Economic growth in 2023 looks to have been around 3% globally and around 1.9% in Australia which was helped by a population surge partly offsetting severe mortgage pain for some.
2. Disinflation. Inflation across major countries has fallen sharply from peaks of 8 to 11% last year to around 2 to 5%. Australia lagged on the way up and is doing the same on the way down, but it’s falling too.
Source: Bloomberg, AMP
3. Peak interest rates. It took longer to get there and there was a “high for longer” scare on rates but most major central bank policy rates look to have peaked and this probably includes the RBAs cash rate.
4. Geopolitical threats proved not to be as worrying as feared – the war in Ukraine remained contained, conflict in Israel flared again but so far has not spread to key oil producers (oil prices actually fell a bit) and the Cold War with China thawed a bit. A lack of major elections helped.
5. Artificial intelligence hit the big time after the launch of Chat GPT with hopes it will boost productivity. The immediate beneficiaries were key (mostly US) tech stocks – which helped them reverse the 2022 slump.
Four big worries for 2024
The worry list remains long:
Inflation is still too high in most major countries – so central banks could still have another hawkish turn if it proves sticky above targets.
The risk of recession is high reflecting the lagged impact of rate hikes. It’s hard to see how the biggest rate hiking cycle won’t have a major impact and the risks are already evident in tighter lending standards in the US, falling lending in Europe and stalling consumer spending in Australia. And unlike a year ago many are no longer worried about a recession which is negative from a contrarian perspective.
Risks around the Chinese economy and property sector remain high.
Geopolitical risk is high: with half the world’s population seeing 2024 elections including the US, the EU, India, Russia and South Africa; the US Government could have a shutdown starting 19 January and could have another divisive Biden v Trump presidential election with a Trump victory running the risk of weakening US democracy and US alliances and another trade war; the result of Taiwan’s 13 January election could see an easing or an escalation of tensions with China depending who wins; the war in Ukraine is continuing; and there is a high risk that the Israel/Hamas war could spread, e.g. to Iran, threatening oil supplies.
The recession risk suggests a high risk of a sharp pull back in shares.
Three reasons for optimism
However, there is reason for optimism.
First, inflation has eased sharply to around 3% in major industrial countries and around 5% in Australia and is likely to continue to fall as: supply chain pressures have reversed; demand is cooling; and labour markets are easing with sharp falls in job vacancies. This includes in Australia which lagged US inflation on the way up and is just doing so again on the way down with our Inflation Indicator pointing to a further sharp fall.
Source: Bloomberg, AMP
Second, we expect central banks in the US, Canada and Europe to start cutting rates in March or the June quarter. While there is still a high risk of one more hike in Australia in February, falling inflation should head this off so our base case is that the RBA has peaked ahead of rate cuts in the September quarter, taking the cash rate down to 3.6% by year end.
Third, while recession is a high risk and markets are no longer priced for it unlike at the start of 2023 if it does occur it should be mild:
Most countries have not seen a spending boom that needs to be unwound and traditionally makes recessions deep. For example, in the US there has been no overinvestment in housing and capex, leverage is low and inventory levels are low.
Similarly, in Australia consumer spending, housing investment and business investment are not running at excessive levels relative to GDP. And there is still a large pipeline of home building work yet to be done providing some offset to the slump in building approvals, and business investment plans still point to growth (albeit slower than it has been).
Chinese growth has well and truly lost its lustre and property sector risks are high, but it’s likely to target roughly 5% GDP growth again and back this up with more fiscal stimulus if need be.
What to watch?
The main things to keep an eye on in 2024 are as follows: sticky inflation and central banks; the risk of recession and whether it’s mild or deep; the Chinese economy and property sector; US shutdown risks and the presidential election; and in Australia how the consumer and home prices respond to the lagged impact of high rates, including via rising unemployment.
Source: AMP