In many ways, the past few years have demonstrated that volatility is the new normal. The global economy has been through immense challenges; from the embers of a global health pandemic, to cost of living pressures and simmering geopolitical tensions, threatening to split the globe into major rival blocs. The ensuing rapid monetary policy tightening not only chipped away at business and consumer confidence, but also triggered bouts of financial sector instability.
These multiple overlapping shocks - otherwise referred to as the poly-crisis - have left the world at a crossroads. Against this canvas, it is hard to recall a time when the trade-offs for policymakers were more compelling. While fiscal policymakers remained puzzled on how to nudge their economies back on the sustainable growth path, monetary policy makers have on their part, demonstrated their ability to remain rigidly hawkish, longer than markets can remain solvent - all in efforts to anchor inflation expectations.
The good news is that inflation appears to be narrowing towards central bank targets across many economies. Yet, headline inflation remains extremely fragile and prone to varied shocks. As such, we do not expect a sharp U-turn in the path of interest rates. Rate cuts in 2024, if any, are likely to be gradual and intermittent at best. To avoid the much-feared economic recession/prolonged slowdown, we think the focus needs to shift from containing inflation within policy targets to sustaining an optimal growth-inflation mix. Yet at the same time, we sense an ideological shift from pro-expansionary fiscal regimes of the yester-years to an increased focus on fiscal sustainability – especially for low and middle-income countries.
Looking ahead, we are stepping into a new regime characterized by higher volatility and increased uncertainty even as several economies brace up for an upbeat election year. Since elections are largely the conduits of major socioeconomic and political change, we anticipate several policy inflection points in 2024. Yet, we foresee this global shift tilting towards deglobalization and autarky, as nations become more protective of their own resources and markets. As such, global trade is likely to slow down, and retaliatory trade barriers are likely to increase in the year.
We expect significant divergence of performance both across and within all major asset classes in 2024, even as the lagged impact of monetary policy tightening takes effect. Yet, we remain net positive on equities. However, the need for investors to be increasingly selective cannot be overstated. In other words, we think security selection will bear the most impact on portfolio returns in 2024. We tip fixed income assets to experience higher rate volatility as markets price-in mixed expectations about the interest rate trajectory over coming quarters. Yet, we think investors are better off extending duration exposure to lock-in attractive yields. Commodity prices on the other hand, should experience higher volatility, largely stemming from foreseeable supply and demand mismatches.
Defensive portfolio allocation strategies will be necessary in this new regime, and the as golden rule goes, diversification remains key. As such, the volatility we mention so frequently should not lull us into inertia; On the contrary, we can stand prepared to filter the noise and swing into action.
