UBS Global Wealth Management (GWM) chief investment officer Mark Haefele has warned investors to prepare for a “new world” defined by economic uncertainty and geopolitical instability as well as profound technological change.
In UBS GWM’s “Year Ahead 2024” outlook, Mr Haefele highlighted three key developments that are expected to dominate in the coming year.
First, slower growth is anticipated for the US economy in 2024 as consumers face mounting headwinds. Growth is forecast to remain subdued across Europe, while China is set to enter a “new normal” of lower but potentially higher-quality growth.
“We think this environment speaks in favour of tilting equity allocations toward quality stocks, including in the technology sector, that can deliver earnings growth even against a backdrop of slowing global growth,” said Mr Haefele.
Second, Mr Haefele said that central banks were expected to begin cutting interest rates in the year ahead.
“In our view, government bond markets are overpricing the risk that high interest rates will represent the new normal, and we also expect yields to fall in 2024. This speaks in favour of limiting cash allocations and locking in yields in quality bonds,” he said.
Finally, politics is expected to play an outsized role in 2024, with the US presidential election, the Israel-Hamas and Russia-Ukraine wars, and the ongoing rivalry between the US and China all potentially having global market repercussions.
“Political decisions to engage in large and unfunded fiscal spending create both upside and downside investment risks to base case economic forecasts,” Mr Haefele added.
“Investors should prepare to hedge market risks. We see capital preservation strategies, macro hedge funds, oil, and gold as hedges to focus on in 2024.”
As part of its outlook, UBS GWM outlined four potential scenarios for the year ahead, the most likely being a “soft-ish landing” with a probability of 60 per cent. In this scenario, both equities and bonds would deliver positive returns.
“Slowing US economic growth, falling inflation, and lower interest rate expectations should mean lower yields, supporting bonds and equity valuations, while the absence of a severe US recession should be sufficient to enable companies to continue to grow earnings,” UBS said.
The next most likely scenario, according to UBS GWM, is a so-called “lift-off” in which strong economic growth buoys earnings growth, investor sentiment, and equity prices.
Under this scenario, which UBS GWM said has a probability of 20 per cent, resilient growth and above-target inflation would also lead to flat returns for bonds.
The likelihood of a “hard landing”, with a sharp slowdown in growth and a moderate-to-severe recession, was put at 15 per cent. This would be expected to result in negative returns for equities and positive returns for bonds.
Meanwhile, an alternative downside scenario, in which both equities and bonds both fare poorly, was viewed as only a 5 per cent chance.
“We see 2024 mark the beginning of a new world,” said Mr Haefele.
“While it can be easy to feel a sense of trepidation when faced with new challenges, years of adversity reinforce three things in terms of investing – the value of global diversification, the virtue of patience, and, most important, the resilience of humankind.”
Looking further ahead to the next decade, UBS GWM identified “five D’s” for investors to watch, namely deglobalisation, demographics, digitalisation, decarbonisation, and debt.
The firm suggested that, in the next 10 years, investors will also have opportunities to capture growth in leaders from disruption, including generative AI, and in private markets.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.