The coming year will see the tides turn for growth, inflation and monetary policy, with the United States expected to enter a mild recession in the first half of 2024. Price pressures will abate, giving central banks scope to cut interest rates, but monetary policymakers will remain wary of the risk of policy errors. Fiscal policies will aim to reduce deficits and debt built up over the past decade while continuing to support the energy transition.
The fragmented economic outlook means investors should seek to limit exposure to areas with excess valuations and that are not properly priced for a global slowdown while gradually increasing exposure to risky assets that could benefit from Fed rate cuts. The sequence is key. We also favour combining long-term structural themes, such as the green transition and geopolitical realignment, with cyclical rotations which will materialise at country and sector levels.
Lastly, the return of volatility in risk assets is on the horizon and correlation dynamics could also change. The pronounced disparities in valuations and the drying up of excess liquidity will lead to a more turbulent environment but, at the same time, markets will be more fundamentally driven.
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