As economies continue to rebalance, we encourage investors to position their portfolios to risk manage and exploit economic and policy differentiation. In our Global Investments Outlook report, we explore the macro outlook for the major economies across the globe, including the U.S., Europe, China, Japan, Australia, and Canada, the portfolio priorities that asset owners should look to adopt, and identify key investment opportunities.
For 2024 and 2025, we prefer a balanced portfolio, with a higher weight to government bonds, equity alpha and other uncorrelated diversifying alphas. This is because risks around our growth outlook are tilted slightly to the downside. We also expect interest rate volatility and government bond yields to fall. Finally, stock concentration, valuation and dispersion support active equities.
US nominal GDP growth, six-month chg. Annualised, % (regular)
Policy rates and market implied path, % (regular)
Key economies
The Federal Reserve flagged important shifts in view in December. They are confident core inflation will hit target levels by December 2024. It expects to cut policy rates materially this year. It sees an economic soft-landing as the more likely outcome. We think there are two additional pathways in 2024 that deserve attention:
Our portfolio strategy views take most account of the likelihood of a soft-landing or minor recession outcome.
The European Central Bank (ECB) could be the first to pivot to policy cuts, with Euro area GDP growth likely to remain relatively weak in 2024. Reductions in government spending will negatively impact growth. Manufacturing output should pick-up but subdued external demand and high gas costs will likely limit any rebound in activity.
UK macro volatility is likely to continue in 2024/25 but interest rate cuts are expected. We expect continued weak growth and a gradual slowing in core inflation. Weak growth is likely to support earlier and several interest rate cuts.
Japan has entered a self-reinforcing cycle of wage and price growth. We expect a pivot to tighter monetary policy in 2024, which is unique amongst the major advanced economies. Strong economic growth, company profit growth and indications of good future wage rises suggest inflation in Japan is sustainable. It also supports good return prospects for Japan equities in our view. The Bank of Japan is likely to tighten policy in response to good conditions – by allowing bond yields to rise, then interest rate hikes.
A challenging longer-run growth outlook drives GDP volatility for China. Industrial output growth has been slowing relative to its pre-COVID trend in 2022/23. Consumer confidence and spending has been volatile and slow to recover from successive pandemic lockdowns. Property weakness is also likely weighing on household wealth and consumption. Although, high savings rates offer some scope for higher spending.
Portfolio priorities
For 2024/25, we prefer a balanced portfolio, with a higher weight to government bonds, equity alpha and other uncorrelated diversifying alphas.
Downside risk hedging is the process of analysing which tail events you would like to immunise your portfolio against and adding exposures – at the right price – that will provide a payoff if such a tail event occurs.
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