Schroders’ top 10 predictions for 2024: Favours S&P 500 and investment-grade bonds in the “new normal”

Asian and emerging-market equities to see tailwinds from fundamental recovery

06/12/2023
Jan22_Outlook 2022 Sustainable investment

Schroders today revealed its top 10 predictions for 2024, highlighting the firm’s investment convictions under the “new normal” as well as the growth and income opportunities it sees across global asset classes and investment themes in the year to come.

In early 2023, many economies globally showed robust growth as their post-pandemic normalisation continued. Yet, a large number of central banks also continued to tighten their monetary policies in the face of persistently high inflation. In addition, geopolitical risks, such as the Russia-Ukraine conflict and recent tensions in the Middle East, have contributed to ongoing market volatility and an already challenging market environment for investors to navigate.

Despite the slower pace of global economic growth, Schroders remains optimistic about the global economy achieving positive growth in 2024.

Keiko Kondo, Head of Multi-Asset Investments, Asia at Schroders, said: “In 2022 and 2023, central banks around the world tightened their monetary policies to curb inflation, which brought risks and uncertainty to financial markets. For example, in the US, although inflation has slowed, it will still take time for it to reach the 2% target level set by the Federal Reserve.”

Whether the increase in consumer spending, as accumulated excess household savings from the pandemic continue to be released, will reignite inflation remains to be seen, she explained. On the labour market front, labour shortages during the pandemic have lifted employee wages and overall inflation.

Kondo added: “We expect inflation in 2024 to moderate but still remain higher, which will likely lead to interest rates remaining higher for longer while central banks continue to focus on efforts to tame inflation. Under such circumstances, financial markets will inevitably face uncertainty and behave volatile at times, and we may see widening disparities between different markets and asset classes. Investors who take an active and dynamic approach may be better positioned to capture emerging opportunities, as well as withstand market movements.”

In terms of equities, Kondo said the firm is optimistic about the outlook for the S&P 500, especially if the global economy manages to avoid recession in 2024. Part of the conviction is based on the expectation that rising adoption of innovative technology, including artificial intelligence (AI), and the broadening productivity boost that result could support related industries, which could then lead to a much broader based rally of US stocks beyond the “Magnificent 7” stocks.

On the other hand, recent economic data showed that the Purchasing Managers' Index (PMI) in Mainland China and India is gradually stabilising, and economic data from Taiwan and South Korea are also showing significant improvement. In contrast, the PMI in the eurozone remains rather subdued. As such, Schroders believes that Asian and emerging-market equities will start to find fundamentals turning more favourable in the coming year, allowing them to start catching up after a few years of underperformance.

As for fixed income assets, Kondo said: “Given the increased chances of global economies being able to avoid a hard landing scenario, and with the US and European investment-bond yields at near 6% and 4.5% respectively, global investment-grade bonds look attractive from the perspective of valuation and yield, thereby attracting capital inflows into these asset classes," she added.

When it comes to currencies, Schroders believes that exporters in Asia will likely benefit from the recovery of the global goods cycle, and therefore prefers Asian currencies over the US dollar. With the growth differential between Japan and Europe seemingly entrenched, the firm expects the Japanese yen to be at a turning point in 2024.

Owing to the escalating Russia-Ukraine conflict and tensions in the Middle East, stability in the global financial markets is once again challenged, leading to capital inflows into safe-haven assets such as gold. Schroders believes that gold will continue to serve as a risk diversifier in investment portfolios in 2024.

Kondo said: “The Russia-Ukraine conflict led to a sharp rise in oil prices, prompting many markets to accelerate the development of their new energy sources as well as their energy transition efforts. Even though rising interest rates have led to a decline in valuations for energy transition-related companies, we believe imbalances in supply and demand alongside attractive valuations can drive through upside price potential within the sector.”

Private assets have been a rising star in financial markets over the past few years, she added. “Investors could consider adding alternative assets to their multi-asset investment portfolios to not only seek returns but also for diversification benefits,” Kondo said.

Schroders Top 10 predictions for 2024

1) Long S&P 500

2) Long investment-grade credit

3) Long US high-yield versus Russell 2000

4) Long local currency emerging-market (EM) bonds

5) Long gold

6) Long emerging market (EM) / Asia equities versus European equities

7) Long Asian currencies versus US dollar

8) Long Japanese yen versus euro

9) Long clean energy

10) Long private assets

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