Diminished consumer spending and corporate investment indicate a deepening slowdown in the G7 business cycle, according to a 2024 investment outlook.
While the impact of continuing high rates may trigger unemployment rising to 1-2% toward 2025, robust corporate and housing balance sheets have, so far, averted recession, estimated asset manager Robeco.
Contrary to market expectations, the US economy has exhibited unexpected resilience marked by low unemployment and disinflation in 2023. This phenomenon has extended to the Eurozone, stated the outlook.
However, Peter van der Welle, multi-asset strategist at Robeco, warns of challenges for central banks in achieving further disinflation, anticipating a steeper trade-off between unemployment and inflation. “The effective immunization of sovereigns, corporates and households against a high real interest rate regime is set to fade. The current consensus narrative suggests a soft landing, where inflation is controlled without significantly increasing unemployment. But we believe this is overly optimistic,” added.
While AI adoption is a potential solution for enhancing productivity and cutting unit labour costs, the asset manager shared that its supply-side potential has yet to manifest in improved productivity figures.
The geopolitical landscape in 2024 is likely to be “complex”, with elections in G7 countries, the rise of far-right parties, ongoing conflicts, and strained relations with China contributing to increased economic policy uncertainty.
In 2024, financial markets will undergo tighter conditions with potential implications for bonds as a hedge due to uncertain peak yields. Fiscal concerns may lead to steeper yield curves, and bond-equity correlations could turn negative if core inflation drops below 3%.
Equities confront challenges such as reduced liquidity, geopolitical tensions, and high interest rates. Upbeat double-digit consensus earnings growth projections may induce multiple compressions, posing downside risks.
Europe and Japan might navigate these challenges more resiliently, it predicted. In the currency market, the US dollar’s high valuation could be peaking as the Fed approaches a cutting phase, making the dollar-yen pair noteworthy for the yen’s potential to rise.
The growing importance of sustainable investing is reflected in regulations, green investment securities, and increased shareholder activism, creating a polarised discourse.
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