Global Risk Radar

While inflation in the developed world looks on track to normalize by the second half of this year, uncertainty around the economic outlook and heightened geopolitical risks leave the door open for a variety of market outcomes in 2024.

Economic uncertainty and markets
Growth is likely to slow in the developed world, but only slightly below trend over the next 12 months. The US economy has proven resilient so far, with a tight labor market and stable consumer spending. Economic weakness in Europe has also been limited and mostly contained within the manufacturing sector. Inflation should continue to slow in the US and in Europe, normalizing by mid-2024. Central bank policy rates reached peak level in 2023 and will likely decline this year. The risk is that either inflation proves stickier and prevents central bank from cutting rates or economic activity falls to levels which significantly worsens the earnings outlook for companies.

China's economy grew 5.2% in 2023, slightly more than the official target. While it is one of the country’s lowest in decades, Chinese officials have been working hard to keep the country’s economy stable, especially in the property and banking sectors. Major local governments have set GDP growth target at 5% or above in 2024. In our base case, we expect China to promote GDP growth through fiscal and monetary stimulus and therefore prefer emerging market equities over US equities.

Geopolitical Uncertainty
We expect politics to play an outsized role in 2024. The US presidential election, the ongoing Israel-Hamas and Russia- Ukraine wars, and the rivalry between the US and China could all affect markets globally. Investors should prepare for bouts of politically driven volatility and consider hedges. Arguably the most market-relevant geopolitical events are currently taking place in the Middle East. We expect the conflict to continue, but not to broaden further. The disruptions remain acute as US/UK strikes have not prevented more Houthi attacks and shipping costs continue to rise, especially on Europe-bound routes, posing inflationary pressures if disruptions persist. However, the impact on markets has so far been marginal. Also the oil price has been little affected, although supply shocks could push oil prices higher at any time.