After a very challenging year in 2022, investors have enjoyed better returns so far in 2023. Macroeconomic challenges remain, however. Cyclical risks are high and, in our view, the global economy has changed in fundamental ways recently. Understanding these themes will be crucial to return delivery in the years ahead.
A new macroeconomic regime
Growth in the supply side of the global economy is slowing down. This has profound implications for capital deployment and asset allocation.
Cyclical risks are elevated
The Euro area and UK economies appear to be on the cusp of recession. The US held up remarkably well in 2023, but some of the tailwinds supporting it are fading.
Monetary policy changes tack
After a year during which developed-world central banks had a singular focus on fighting inflation, many are now shifting gears.
Global debt and credit markets
Patience may be rewarded in 2024
With inflation falling, gross domestic product (GDP) growth slowing, central banks pausing, and not much priced in in terms of interest rate cuts over the coming 12 months or so, we see investment grade bonds as good value and we are constructive on duration. In the US, municipal bonds and agency mortgage-backed securities (MBS) also offer a good risk-adjusted return proposition, in our view. Credit spreads are generally not at levels consistent with recessionary conditions, so we are more cautious on credit, particularly higher-risk credit.
Global listed equities
Searching for value amid market volatility
Listed equities may face headwinds from the more volatile economic backdrop and the fact that bonds have become a worthwhile alternative again. While US large-cap stock valuations look stretched, opportunities may remain in small-caps and listed real assets. Outside of the US, China and Europe look increasingly attractive on valuation grounds.
Real assets
Cyclical challenges but positive longer-term drivers
Infrastructure continues to be relatively well placed in 2024 due to its defensiveness, ability to protect against surges in inflation, relatively high yield, and robust policy support globally. It also has a large exposure to the secular growth trends of digitalisation and decarbonisation.
Following two challenging years, real estate’s pricing reset is expected to create opportunities particularly in the rental housing and logistics sectors, supported by stronger demand drivers and a pullback in new supply. Offices face ongoing headwinds from working-from-home practices, but repurposing and repositioning opportunities could emerge in 2024 as pricing adjusts below replacement costs.
The peace dividend could reverse
Fiscal positions for the G7 spending (ex Japan military) will be stressed as higher interest rates increase debt servicing costs.
Source: Stockholm International Peace Research Institute (SIPRI) Military Expenditure Database 2023, 30 October 2023.
Soft landings are hard to do
Former US Federal Reserve Chair Alan Greenspan succeeded in the mid-1990s, but this is the exception rather than the rule.
Source: Macrobond (November 2023).
Ben Way
Group Head, Macquarie Asset Management
In his letter, Ben Way introduces the themes of Outlook 2024.
Daniel McCormack
Head of Research
David Roberts
Head of Real Estate Strategy
Aizhan Meldebek
Global Infrastructure Strategist
Graham McDevitt
Global Fixed Income Strategist
Patrick Er
Economist
John Pickard
Chief Investment Officer – Equities & Multi-Asset
Derek Hamilton
Economist
Stefan Löwenthal
Head of Global Multi-Asset
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