The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
At Wellington, we do not have one unified “house view” on the global economy and markets. That’s because we know that the best investment ideas are often uncovered when a diverse talent pool is encouraged to bring forward a range of unique, independent, and (at times) divergent perspectives and insights. By debating new ideas and sharing research across asset classes, regions, and investment disciplines, our investors can uncover hidden insights, risks, and opportunities. This executive summary distills the distinctive viewpoints of multiple Wellington investors, strategists, and other professionals.
Our 2024 Outlook reflects key macro shifts including slower growth; structurally higher inflation and interest rates (even though inflation is cooling for now); deglobalization; and the diverging paths of local and regional economies and markets. These trends are part of an intensifying regime change — a break with the patterns we have witnessed since the global financial crisis. Navigating these shifts will be made more complex by two growing influences: the transition to lower-carbon energy sources and the adoption of generative artificial intelligence (AI) technologies.
Global growth is slowing, with a high chance that most countries will experience at least one quarter of contraction. Some may even face a technical recession, but ultimately these downturns should be mild, especially given real incomes and ongoing tightness in labor markets. As they look to strike a balance between inflation and growth, central banks have been keen to indicate that rates have now peaked. With monetary policy in flux and governments increasing their spending commitments amid reduced investor appetite for sovereign debt, we expect risk premia to experience a structurally upward trend.
Another key theme is deglobalization, which means that thinking locally may yield greater value. Many small, open economies could follow very different cyclical and policy paths from the US, the euro area, and other large economies.
A challenging geopolitical backdrop includes diverging policies as governments are focused on establishing both climate resilience and energy security, primarily by reducing dependence on fossil fuels. The race is on for energy-transition dominance and the massive market opportunities that go with it. Getting a head start matters because renewable energy has economies of scale. Today, China has a clear head start in the energy-transition race. This transition, along with geopolitical tensions, are leading to protectionism and inward-looking industrial policy; accelerated investment spending; and, due to the localization of supply chains, higher inflation.
“The shift to lower-carbon energy sources and broad-based electrification represents the most significant economic transformation of the past one hundred years.”
Another notable area of focus is generative artificial intelligence While it is unclear how quickly companies will reap the benefits, the breadth of industries that could leverage AI brings hope for a more productive future in the medium term.
“Advances in artificial intelligence could alter the macro environment meaningfully by raising both trend growth and expectations of long-term real interest rates.”
We anticipate structurally higher inflation and interest rates (and a higher cost of capital), different leadership within the equity market, and an environment where valuations again matter. This is likely to drive dispersion of returns that could create the ideal hunting ground for fundamentally focused long/short investors. We also think the changing environment has created space for macro strategies to add value by taking advantage of regional divergences and potentially providing downside mitigation in volatile environments.
We expect a brighter year for venture capital. Just as privates trailed the public market correction in 2022, we believe they will follow its recovery, with a lag. We are optimistic that 2024 may favor cycle-tested private managers that have weathered this most recent storm.
In private credit, we believe investors are likely to continue to see changing lending sources, allocations, and deal terms. Areas like investment-grade private placement, which maintains strong covenant packages, may be compelling in the year ahead.
Global supply chains continue to be a top concern for governments and investors alike, and they will be an area of focus for our Sustainable Investment Team in 2024. Our SI investors believe companies will have opportunities to reduce costs, mitigate risks, and stand apart from competitors by demonstrating thoughtful supply chain management and providing clarity for stakeholders. For that reason, we aim to deepen our research in three key areas — the low-carbon energy transition, biodiversity dependencies and impacts, and modern slavery — all of which have extensive, intricate ties to and dependencies on global supply chains.
“Policymakers, investors, and issuers lack sufficient understanding of cross-company linkages . . . greater transparency on these interconnections would enable investors to more clearly identify risks and opportunities.”
While the US Federal Reserve is likely to cut policy rates in the first half of the year, other regions, notably Europe, may take different paths. It is possible that the US economy could experience an economic slowdown in 2024. That is why members of our multi-sector fixed income team advocate a moderately defensive credit risk posture rather than going all in on the optimistic soft-landing scenario currently reflected in spreads. Bouts of volatility in 2024 could create better entry points to add credit exposure. We believe the potential upside from earning today’s historically high yields and being ready to take advantage of credit market dislocations as they arise outweighs the possible risk from rates moving higher. Dislocations in higher-yielding credit markets could offer the most compelling opportunities in 2024.
"We note an increased potential for policy errors as central banks and markets navigate a treacherous trade-off between inflation and growth."
We expect US equity market concentration to loosen, and greater cyclical volatility and dispersion to provide more opportunities for active managers. Regional and market-cap valuation dislocations also present a potential roadmap for capturing upside. Japan, Europe, and emerging markets look attractive, as do macro- and rate-sensitive segments and sectors. We currently view the most attractive potential investments as a barbell, with quality compounders on one end and more heavily discounted macro- and rate-sensitive sectors and regions on the other.
As economic conditions stabilize and rates and inflation moderate, one market segment that has room to run in 2024 is small-cap stocks. Small caps currently trade at extreme valuation discounts to large caps, particularly in the US.
Our commodities investors believe that this market segment offers a compelling structural investment opportunity owing to the confluence of a number of factors including low inventories, attractive roll yields, mid-single-digit collateral returns, and rising production costs. Amid a regime of higher interest rates and moderate inflation, we believe future commodities corrections may be related to a weakening macro environment and should be viewed as buying opportunities. When macro concerns recede, prices have the potential to snap back given the absence of the typical cushion from inventories and spare capacity.
Three themes are top of mind for our multi-asset team: opportunities in today’s higher-yielding world, managing equity market concentration and risk, and the link between resilience and innovation. In reference to the latter, in a world of more frequent and less predictable economic cycles, an allocation to thematic investments has other benefits beyond exposure to innovation. Thematic allocations could also help increase diversification given how much cyclical return is typically found in portfolios. The team provides views on global asset allocation both at a high level and with certain countries, regions and sectors within markets.
