Over the last year we have entered a market regime characterised by deglobalisation, decarbonisation and divergence. We believe the next decade will be unlike anything we have lived through before and we cannot rely on historical models and data, or experience alone, to navigate this volatile regime. While this may present challenges for charity investors, we think there will also be exciting pockets of opportunity.
Divergence
Looking into 2024, we expect to see some divergence between major economies. We think the probability of recession has decreased in the US, given it is likely interest rates have reached a peak. But a slowdown could be on the cards for other major economies, with a potential deceleration in growth in the UK, Europe and China.
When it comes to interest-rate increases, we think central bank monetary policy has essentially run its course. From here, what matters is how cumulative rate hikes eventually affect the real economy. Overall, ‘higher for longer’ is likely to remain the mantra in 2024, especially as inflationary pressures remain elevated.
With bond markets now providing much higher yields than they have for a decade, we see increasing exposure to bonds as an opportunity for investors to increase both diversification and returns. With central banks having increased interest rates to reduce inflation expectations, we expect to see better returns in bond markets than investors have experienced over the last couple of years.
Higher interest rates and the prospects of a downturn are likely to prove challenging for equity markets, as companies have to adjust to a higher cost of capital and increased earnings volatility. Nevertheless, opportunities will emerge for active investors, particularly in businesses with pricing power operating in areas supported by structural trends. Many companies currently appear richly valued, but suitable entry points may appear during periods of downside volatility.
Deglobalisation
Globalisation has been a deflationary force over the last few decades, but this is reversing. Despite headline inflation figures appearing to fall, inflationary pressure remains, and supply chains are becoming shorter.
Countries are onshoring key industries, as well as limiting trade and free movement of capital and people, because they do not want to give away their assets to military and economic rivals. The move from efficiency of production to security and resilience as the primary driver is inherently more inflationary, structurally, than any other trend we have seen in recent decades.
China’s influence on the global stage continues to change, owing to its shift from a global manufacturing hub to a consumer-led economy. Tensions between China and the US look set to continue, while global power competition in other areas, including in relation to the Russia/Ukraine conflict, is also likely to have significant implications for investment markets.
Decarbonisation
Elsewhere, with decarbonisation being a key facet of the new market regime, it is important for an investment process to support the transition to a low-carbon economy as we move into 2024 and beyond.
A lot of investor attention is moving towards the beneficiaries of decarbonisation as governments increasingly look to incentivise capital to flow into areas that help reduce the impact of climate change. Many of the companies in the energy supply chain – from turbine and solar panel manufacturers to developers of wind farms – have now come back to more attractive valuation levels after seeing a cyclical downturn. This is also true of the electric-vehicle supply chain and, for longer-term investors, there could be an opportunity to identify the ‘winners’ of the next decade.
Looking ahead
This presents a complex backdrop for charity investors, but one not without opportunities. As there is likely to be a growing dispersion of performance between different asset classes, sectors and securities, we believe the benefits of taking an active investment approach could become increasingly apparent.
