Who’s Afraid of Inflation and Recession in 2024?

Key Takeaways

• 1. Despite concerns about stagflation in 2023, the economy did not perform as badly as expected.
• 2. Citi Global Wealth expects U.S. economic growth to accelerate in the second half of 2024 and 2025, after a potential slowdown in early 2024 as the job market cools.
• 3. Investors may look toward global equity, fixed income and alternative investments in 2024 as the markets anticipate a “big reset”. A well balanced portfolio may deliver better performance over the next decade than it has experienced in some time.

Who’s Afraid of Inflation and Recession in 2024?

As we navigate through the early months of 2024, the question at the back of many investors’ minds is whether we have seen the worst of inflation and recession concerns.

After all, the past year has seen economies across the world grappling with the twin challenges of rising prices and the ever-present threat of economic downturn.

How much should investors factor in recessionary and inflationary risks into their portfolios? And how will this affect our investment strategies in the coming year? We analyse the prospects of the economy to find out.

2023 was not as bad as feared

Despite all the concerns about “stagflation” – high inflation and low economic growth, 2023 did not turn out to be as bad as feared.

The global economy grew by 3.1% in 2023, above the forecasts by the International Monetary Fund (IMF) at the start of the year, supported by resilience in the U.S. economy. The U.S. economy expanded by 2.5% in 2023, accelerating from the 1.9% growth in the previous year, as the high interest rate environment did little to dampen the strong pace of consumer spending.

Several large developing economies have also helped to power the global economy. For example, the Indian economy is expected to grow 7.6% in the 2023/2024 fiscal year ending in March 2024, higher than 7.3% initially estimated by the Indian government.

Closer to home, the Singapore economy grew by 1.1% in 2023, avoiding a technical recession as strength in the services sector helped to offset weakness in exports.

Encouragingly, inflation has also moderated significantly with the monetary tightening by central banks globally. In the U.S., the consumer price index (CPI) increased by just 3.1% year-on-year in January 2024, easing from 6.4% in January 2023 and 9.1% at the peak in July 2022. Likewise, Singapore’s core CPI moderated to 3.3% in December 2023 from 5.5% in January 2023 as energy prices eased.

Slow then Grow in 2024

The robust economic growth and easing inflation have set the stage for a more sanguine backdrop for 2024. This was a view shared by Citi Global Wealth, which has forecasted a low likelihood of a recession in 2024, as the aftershocks of the Covid-19 pandemic fades and supply chains normalise.

While there are specific sectors that are weak, they appear to be impacting the various industries that are exposed to them rather than the broader economy. For example, the slowdown in U.S. commercial real estate and certain manufacturing sectors seems unlikely to lead to a full-blown collapse.

As a result, Citi Global Wealth expects U.S. economic growth to accelerate in the second half of 2024 and 2025, after a potential slowdown in early 2024 as the job market cools. Growth could be further supported if the Fed becomes increasingly concerned about the impact of its tighter monetary policy on the labour market, and cuts interest rates at a faster pace.

This pickup in the economy will likely translate into an increase in corporate earnings, which are expected to grow by 4% in 2024 and 8% in 2025. As markets typically lead the economy, this may in turn help to drive stronger stock market performance in 2024.

What should investors do?

With a major recession averted, Citi Global Wealth believes that global equity, fixed income and alternative investments markets are poised for a “big reset” and continue on their upward trajectory after a deeply negative performance in 2022. This simultaneous recovery across different asset classes may then lead to potentially solid returns.

Investors can stand to gain from this “big reset” by getting exposure to fully-invested, broadly diversified portfolios. In particular, Citi Global Wealth expects the “balanced” portfolio to deliver better performance over the next decade than it has experienced in some time.

With more than 50 countries expected to go to the polls this year, investors may have concerns about whether rising geopolitical tensions and uncertain election results may derail the global economic recovery.

However, data has shown that 90% of geopolitical events have not changed the direction of the world economy historically, even though they may have a short-term impact on global asset prices. This illustrates that it may remain beneficial for investors to maintain exposure to diversified portfolios.

What are the investment opportunities?

With the positive macroeconomic backdrop, Citi Global Wealth believes that there are significant opportunities in the two pillars of investment returns – income and growth.

Within income, yields in the US have risen to their highest levels in close to two decades. With investment grade US corporate bond yields averaging 6% and inflation moderating, there is a potential to generate real returns of 4% across a diversified range of fixed income.

As global economic recovery gains momentum and the earnings outlook for US companies turns more positive, the strong performance for large cap tech stocks may broaden out to small- and mid-cap (SMID) US stocks.

According to Citi Global Wealth, these SMID stocks appear cheap with a deep discount of 39% on current-year estimates compared to the valuation for the large cap stocks. This means that there may be value opportunities in growth stocks in the US market.

According to Citi Global Wealth Investments, the key themes we can delve deeper into include:

• ● Semiconductor equipment makers as the revolution in artificial intelligence (AI) depends heavily upon advanced semiconductors
• ● Cybersecurity stocks as online fraud and political disinformation intensifies
• ● Medical technology and tools stocks with AI-accelerated drug discovery and testing

If you are looking to gain a headstart in your wealth journey, Citigold offers clients access to timely wealth insights through its global network of expert analysts and advisors. Start your wealth journey here with us to enjoy access to these opportunities today.

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