The 2020s have so far has been a turbulent period for the global economy. The pandemic roiled markets and interrupted the smooth working of supply chains. Then, as economies started reopening, Russia’s invasion of Ukraine in February 2022 added significant inflationary pressures.
Central banks launched an aggressive monetary tightening cycle to tackle rising prices, which radically altered the market landscape. The economic effects of this policy shift are still playing out today, and over the coming year we see scope for further disruption.
As such, with uncertainty continuing to surround financial markets we have identified four key themes that we believe will define the trajectory of markets over the course of 2024.
The first theme is political elections, which will be an unavoidably dominant factor over the year with over four billion people (41% of the world's population) going to the polls. The US, UK, India, Indonesia and Russia – some of the world’s most populous and economically important countries – are set for general elections over the coming year.
In the US, the candidate most likely to disrupt existing economic arrangements is former president Donald Trump. This is something investors need to take seriously. Keen to avoid the disorganisation seen in his first term, Team Trump has been busy recruiting aides who can take hold of the agenda from the start.
Trump-era foreign policy was erratic and transactional but benefited from a broadly peaceful and stable backdrop. Since then, the world has become more volatile due to the wars in Ukraine and Gaza, alongside China’s more assertive stance in East Asia.
Political risk is an ever present for global investors, but the range of possible outcomes appears wider this year.
Our second theme for 2024 is the prospect of multiple interest rate cuts from the major central banks. Market expectations are for five interest rate cuts in the US and eurozone in 2024, and three in the UK.
This is based on the consensus that inflation in most regions will still be ahead of central bank targets, but much closer to those targets than today. Similarly, because interest rates have been rising for a while, this may have a braking effect on economic activity and central banks may need to cut rates to support growth.
It is reasonable to think we are at the peak for interest rates, but it is still sensible to be cautious about how quickly they might fall. Even forecasts that have inflation coming down still anticipate core inflation will be above headline inflation. If we get any shocks or volatility in commodity prices, key drivers of headline inflation, allied to above-target core inflation, we could potentially end up with positive surprises.
This is not our central case but in such a scenario, expected cuts in rates may not materialise. The risk may be underappreciated by markets. Nevertheless, the slowing of inflation has increased the odds of a soft landing, which are now much higher than six months ago.
One continuing theme from 2023 will almost certainly be the continued rise of artificial intelligence (AI). We believe this could allow for a broader range of companies to improve productivity, supporting global equity markets.
This technology is not going away; the question is whether the gains will be spread beyond a clutch of leaders in Silicon Valley. If AI leads to better productivity among a wider range of companies, that could help profitability and boost equity markets across the board.
In the medium-term, the rollout of AI, along with other major technological advances in areas such as healthcare, could reinvigorate productivity and open up the potential for continued profit growth among companies, without necessarily being accompanied by a significant reacceleration of inflation.
While this is likely to be a medium-term story, we may start seeing signs of these trends shaping the fortunes of individual stocks in 2024.
And lastly, there is China. In late 2022, there was a strong consensus that China would see a significant resurgence in activity post-Covid, but the reality has been disappointing. Despite the People’s Bank of China stressing in November the country was still on course to hit its full-year GDP growth target of 5%, many in the market had hoped for more.
While we shouldn't forget the lasting impact of China’s focus on non-economic objectives, we are probably approaching a stage where the pace of economic stimulus is likely to increase rather than decrease into the new year. We expect the authorities will put more capital to work to support growth and perhaps ease off on some of their concerns about financial leverage and speculation.
More stimulus and faster Chinese growth would support global demand in the short-to-medium term, particularly among emerging markets. However, longer-term challenges around the property sector and rapidly ageing demographics are not going away. We would expect to see them re-emerge as dominant themes after any early sugar-rush from stimulus measures.
Sunil Krishnan is head of multi-asset funds at Aviva Investors. The views expressed above should not be taken as investment advice.