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The economic distortions of the past few years have produced tectonic shifts in the global investment landscape. The massive fiscal stimulus and near‑zero interest rates seen during the pandemic have given way to tighter monetary policies and sharply higher bond yields.
While the U.S. Federal Reserve and other major central banks have made progress against inflation and policy rates appear close to their peaks (Figure 1), our analysis is that the Fed is likely to hold rates steady in 2024.
Monetary policy effects typically are felt with a lag, so global economic growth remains at risk. The eurozone already is in recession, and China’s post‑pandemic recovery has been disappointing. However, the U.S. economic outlook is more encouraging, as corporations and consumers both have proven less sensitive to higher rates compared with other major global economies. Fiscal stimulus has added further support.
(Fig. 1) Central bank policy rates.*
As of November 30, 2023.
*U.S. = federal funds rate upper limit; eurozone = European Central Bank main refinancing rate; UK = Bank of England official bank rate; Japan = Bank of
Japan overnight call rate; Australia = official cash rate, end of period.
Sources: Haver Analytics/Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, Reserve Bank of Australia. T. Rowe Price
calculations using data from FactSet Research Systems Inc. All rights reserved
Uncertainty is likely to keep fixed income volatility high in 2024. But if major central banks remain on hold, volatility is likely to move to the long end of the yield curve, as opposed to the sharp moves seen at the short end as central banks tightened. Surging U.S. Treasury issuance also could keep upward pressure on longer‑term yields.
Attractive yields should support below investment‑grade (IG) corporates, with improved credit quality helping keep defaults relatively low. Shorter‑term IG corporates also appear to offer opportunities. Careful attention to issuer fundamentals will be critical.
The global equity rebound in 2023 was dominated by a handful of mega-cap U.S. technology stocks. But positive fundamentals in some regional markets and innovations in other key sectors should help expand the opportunity set in 2024.
Health care innovation is one area that could offer opportunities, as could the energy sector, thanks to capital investment in both traditional and renewable energy sources. Commodity-related sectors appear to have bottomed and could be attractive hedges if inflation proves stickier than expected.
Emerging market (EM) equities are attractively valued relative to developed markets. We see selective opportunities in China, despite sluggish economic growth. Within the developed markets, structural and cyclical factors should be supportive for Japanese equities.
Arif Husain
Sébastien Page, CFA
Justin Thomson
Thinking
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Reasons for caution and optimism as we enter a new economic regime
Each month, our Investment Committee prepare a report revealing the two market themes they are watching, their bull and bear views per region and their latest asset class over and underweights.It has been designed to aid you in your decision making and client conversations.
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