In a world grappling with economic fragmentation, geopolitical tensions, and inflationary pressures, chief investment officers at Europe’s three largest asset managers – Amundi, DWS, and Schroders – see 2024 as a year poised for cautious optimism amid ongoing economic uncertainty.
Together, their outlooks form a mosaic of investment strategies for 2024. Their respective outlook presentations teach investors that the traditional multi-asset portfolio, with a 60-40 bond-equity allocation, is finding new enthusiasm. Emerging markets also are said to offer opportunities. Among the three, Schroders emerges as the most cautious.
“Don’t overrate expectations of an early Fed pivot,” warned Schroders’ group CIO Johanna Kyrklund in the firm’s Crystal Ball outlook call with the media, referring to expectations of early interest rate cuts in the United States. “It will take some time to come together.” London-based Schroders’ is Europe’s No. 3 asset manager with 842,8 billion euro under management.
Turning tides
The titles of their 2024 outlooks all address the evolving dynamics in the global investment landscape, signalling a regime shift to an environment requiring more nuanced, diversified approaches. Amundi speaks about “turning tides”. Schroders firmly believes in the “3D Reset”. And DWS talks about an acronym switch from Tina - ‘There Is No Alternative’, to Tapas - “There Are Plenty of Alternatives”.
Interest rates are near their peak, and inflation is pretty much tamed. This is something that all three firms agree on. As a consequence, bonds and other fixed income products, after nearly three years of disappointing returns, are again vying for top spots in portfolios.
From Frankfurt, Björn Jesch, CIO at DWS (860 billion euro under management), spoke about “a comeback” of fixed income investments. “It’s time to get into fixed income again,” he said during the firm’s outlook call with the media. DWS anticipates bond prices will rise amid a decline of 50 basis points in German government bond yields - Europe’s benchmark - and 100 basis points for US Treasuries, with the risk being that central banks may not find themselves in a position to cut rates.
‘More than convinced’
At Paris-based Amundi (2,089 billion euro under management), group CIO Vincent Mortier already heralded the ‘Bond is Back’ theme in September 2022, a call that, with hindsight, can be regarded as premature. “We were a bit early in that call but now we are more than convinced,” he admitted during Amundi’s 23 November outlook presentation.
Mortier believes central banks will start cutting rates in the second half. For the US, he called a cut of 150 basis points which is well above market consensus. He said such a hefty reduction is necessary “if the Fed is to relaunch the economy.” Reflecting that view, the ECB, according to Mortieri, will reduce rates by 125 basis points. Equally important, he believes the ECB will maintain its repurchasing programme “as a nice pillow for the periphery.”
Schroders’ Kyrklund agreed that the perspective of an economic slowdown with subdued growth in the foreseeable future is “quite supportive” of bonds and noted the prospect of a recession ending late next year. She spoke about a “relatively benign phase where growth is holding up” and that presents investors with “technical opportunities”.
Kyrklund underlined the importance of adapting to the ‘3Ds’ - decarbonisation, demographics, and deglobalisation, a new environment in which investors must work harder to outpace inflation and earn returns. This presents “opportunities across asset classes,” she explained, referring to for example emerging market debt, and, later on, EM equity, or in foundry capacity in semiconductors, given its significance for the global automotive industry.
‘Revenge of the Phillips Curve’
Kyrklund underlined the different speeds of ‘the D-trends’ that Schroders has defined. Demographics is the slowest-moving one, while AI-related investments are the trends changing most rapidly. Demographics, in combination with deglobalisation, is a particularly difficult trend to play as an investor.
“We need to think about the trends towards reshoring in general. When we had this highly globalised situation, it was kind of having Adam Smith on steroids,” Kyrklund said. “What that meant is that it put a lot of downward wage pressure in the West.”
Globalisation thus indirectly enabled the era of low interest rates. The reverse of that is happening now, with the effects being amplified by the effects of an ageing population, she argued. “We reached a tipping point in terms of working age population, it does mean generally we are seeing what I call the ‘Revenge of the Phillips Curve’, a renewed link between the level of unemployment and wages.”
The Phillips curve is an economic theory that inflation and unemployment have a stable and inverse relationship. The theory, which held up during much of the 1980s and 1990s, claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. Today’s reality, however, is that unemployment remains low, with persistent wage costs keeping inflation from slowing. That economic process, as Kyrklund explained, is now feeding through into the world of fixed income.
“We need to recalibrate the range in which we think about fixed income,” she said. “Policy will have to be a bit more proactive to deal with that. Structurally we are not going back to a zero interest policy environment. For me that is fundamental.”
Ukraine war potentially most disruptive
In terms of geopolitics, Russia’s war against Ukraine is seen as one of the most important factors, given the impact of commodity prices on markets and on global GDP in general. “This has more potential, actually, to potentially disrupt global GDP than what has been going on in Israel,” Kyrklund said, adding that Iran’s possible involvement here is a key aspect.
Markets meanwhile still have to adjust for a possible win by Donald Trump in the US presidential elections next November. “It should be the main market mover next year,” said Amundi’s Mortier. Schroders however is not overly concerned about a possible re-emergence of Donald Trump as president. “Although Trump might baulk more, ultimately, his policies are quite similar,” she said, adding however there may be a potential for more volatility.
Next year will see a large number of general elections, including in major emerging economies such as Indonesia and Mexico, and also Taiwan and South Korea. “Emerging markets are too big to ignore,” said Mortier. “It’s a very scattered universe. We are very constructive on Asia at large.” In Latin America, there are situations to avoid, while geopolitics makes Amundi “more cautious” in the Emea region.
This is the first of four 2024 outlooks that Investment Officer publishes. Next week, the perspectives focused on the three major investment categories of stocks, bonds, and private markets will follow.