Clearly, financial market participants are convinced that central banks are done raising interest rates. But critically, they’re also betting that rate cuts next year will happen sooner rather than later. While we agree that rate hikes are over for most major economies, we’re not as confident as the market that we’ll see cuts within the next few months (you can expect them from mid-2024 onwards).

Diverging economies

Inflation has tumbled this year but it’s still not back to levels that would allow central bankers to declare ‘mission accomplished’. In fact, they may find the final few yards – to use an American football analogy – are the hardest to cross.

US economic resilience, while weakening, means we’ll most likely see a mild US recession only from the middle of next year. That said, there’s also a growing probability the Federal Reserve may be able to control inflation without triggering a recession – the much talked-about soft landing.

Growth in the UK and Europe has stalled but should start to recover later next year. Meanwhile, China’s economy shows signs of stabilization as limited government support eases pressures, even though the real estate sector continues to be an obstacle to recovery.

More political uncertainty

Amid this divergence in the fortunes of the world’s major economies, 2024 will also be marked by rising political risks – international and domestic.

There’s a chance the tragic conflict in the Middle East could escalate with all its implications for global oil prices and inflation.

While there are multiple elections scheduled, the world will be closely watching the US and fretting over the economic and political impact of a second term for Donald Trump. Also going to the polls is Taiwan – a potential hotspot for geopolitical rivalry.

Too fast, too soon?

This rally in stocks and bonds could be premature, or at least too enthusiastic, given all the uncertainties that lie ahead next year. Investors will need to navigate a fracturing world – one in which change, not continuity, is a key idea. Fragile scenarios can be thrown off track by a single shock. Further out, long-term challenges – such as the climate crisis and fast ageing populations – will need solutions.

What can investors do?

For the Investment Outlook 2024, we asked our experts how they see the coming 12 months – the big themes, the opportunities as well as the risks. Encouragingly, they all saw opportunities despite slower growth, even if those opportunities stem from expectations of asset-price rebounds following excessive declines.

Read why Global Head of Fixed Income Craig MacDonald is eyeing the impending interest rate pivot and how he prefers high-quality bonds – in particular debt issued by some of the world's stronger banks – over riskier alternatives.

His equities counterpart, Global Head of Equities Devan Kaloo discusses how an economic slowdown favors resilient quality companies – those with pricing power, strong balance sheets, durable competitive advantages and less cyclical earnings. Valuations still look reasonable in many markets outside the US and based on long-term gauges of value.

Stephen Coltman, a Senior Investment Manager in the Alternative Solutions team, warns us to expect more market volatility. However, sophisticated hedge fund strategies can benefit from greater volatility across multiple asset classes, as well as the derivatives instruments linked to those securities.

In the listed alternatives world, Investment Director, Diversified Assets Kenneth McMillan can see the shares of listed private equity investment companies trading at steep discounts to their underlying assets. Why there may be significant potential value based on our long-term outlook.

Sustainability is the theme at the heart of separate articles by Head of Sustainability Insights & Climate Strategy Eva Cairns, and Senior Investment Director, Infrastructure Roger Pim. Eva argues that investors need to look beyond decarbonization as social issues linked to the climate transition, a bigger focus on nature, and the growing need for adaptation measures to tackle climate-related physical risks, receive more attention from regulators. Meanwhile, Roger discusses the opportunities to support sustainability initiatives in the infrastructure world spanning a range of ideas including, biogas, electrification of public transport, waste management and digital fiber networks.

Real estate investors are expecting direct property prices to stabilize in 2024. Head of European Research Craig Wright sees relative value as well as opportunities in ESG-approved commercial buildings, battered real estate investment trusts (REITs), and non-bank property loans.

Finally, Global Head of Quantitative Investments Sean Phayre shows us that building diversified portfolios based on low correlation factors, including value, quality and momentum, may help investors achieve diversification and navigate uncharted waters.