Here comes the crystal ball again.
First, some disclaimer on method: I requested chatGPT to parse a few links from asset managers on their investment outlook 20024, and organize key takeaways. This AI-generated summary is not 100% accurate. My prompt is partial, the system could hallucinate, or vice versa. Likewise, market predictions rarely are spot-on either. Besides, they are highly likely to change every 3 months anyway.
However, the themes identified as “key risks” are reflective of general concerns at a point in time, at year-end 2023. The global economic slowdown is probably the most telegraphed in decades. No wonder that geopolitical tensions score high in the light of the damaging wars in Europe and Middle East. No surprise either to see “technological sector disruption” against the much-talked about AI revolution. Most surprising is that “environmental & climate” risks score so low in both probability and likelihood.
We, and analysts alike, are certainly biased toward emphasizing short-term outcomes, and downplay events with rather longer-term implications. It is all but human, and it relates to the common preference for $1 now, as opposed to $2 tomorrow. But I agree it doesn’t bode well for addressing long-in-the-making climate change. It argues for a change of framing, concatenating environmental risks into shorter-dated buckets. But I leave that for another post.
Markets are only pricing a probability of the outcome of an event. Something that is not on the radar screen will simply not be priced. The famous unknown unknown coined by Donald Rumsfeld, at the time he was Secretary of Defense in 2002. By the way, that’s why the tail-end of probability distribution whacks the dog all the harder than it has been “mispriced”. Look for Nassim Taleb’s “Black Swan” on this.
Interestingly too, no single institution has an outlier’s point of view either. They all tend to see the same types of risks, albeit with slightly different probabilities. Shall we worry that all strategists think alike?
Don’t shoot the market strategist. Their importance is significant to be asking the right questions, not necessarily finding all the answers. Think about it, their role is precisely not to challenge the consensus, but to closely adhere to it, as markets price consensus.
The “wisdom of the strategists crowd”. In fact, analysts have the merit of setting a framework, against which you could either decide to play the mainstream scenario or bet against it. It sets the chessboard on which we all could lay out our strategies.
In terms of investment framework, institutions have a broad consensus on being long US equity, and fixed income investment grade (read “quality”), are largely neutral on developed equities ex-US, and lukewarm on non-investment grade bonds. JP Morgan slightly stands out with more balanced weight outside the US equity comfort zone. On alternatives, opinions differ, which may be the fruit of the system hallucinating as not all institutions express views on this asset class.
What is my 2024 outlook? I’m glad you asked. While “Central Bank policy error” and “inflation persistence” score high in the probability and impact list, I believe that these two don’t have much surprise in store. Inflation is coming down gradually, as shown in Nov23 CPI at 3.1% YoY, and interest rates have indeed plateaued.
In the short-term, investors are front-running interest rates cuts, which looks overdone, and could result in a year-end pull back in bonds and equities.
Ahead of 2024, the focus is shifting from cyclical to structural. Let me explain why it pays out to focus on long-term factors.
There are 3 broad structural changes at play:
1️⃣ generational, with the phasing out of the numerous Boomer generation, gradually replaced by GenX and Millennials,
2️⃣ an increased geopolitical fragmentation, and
3️⃣ a global transition toward a more sustainable model.
For investors in 2024, the attention should be on resilient business models in a slower growth environment. The AI rush will continue to see a few winners, but we should be wary of capital allocation glut. In developed markets, industrials and healthcare should benefit from renewed investment momentum, notably driven by the energy transition, near-shoring, and an ageing population. However, production capacity constraints would keep the lid on most of the manufacturing sector, and services should be the main growth drivers, as it has been the case for the past year.
In Emerging Markets, we believe that investors are blindsided by peak negativity on China, albeit such mood has sizeable short-term benefit for India and Mexico. Over the past year, the HK Hang Seng and Shenzhen CSI 300 dropped ~14%, while India, S&P500 and Mexico returned 12%, 17%, and 26% respectively. A huge chasm, waiting to be bridged.
Lastly, there is probably something to say about the recent widening of market breadth, along with the catchup of value on growth. I believe that rate-sensitive sectors rightly rallied after rates pulled back, but credit pressures remain a key concern going into 2024 recession-like territory. In conclusion, I would not ride this wave too hard.
Stay safe out there !
360 Advisory LLC is a Boston-based RIA managing investments