How to prepare your portfolio for 2024?

As we approach 2024, the global economic landscape is evolving with various challenges and opportunities. For retail investors, understanding the global economic outlook is crucial for making informed decisions. In this article, we’ll explore the key factors likely to shape the global economy in 2024 and discuss how to position yourself for success in this ever-changing environment.

The Current State of the Global Economy

Before I dive into the outlook for 2024, it’s essential to take stock of the current economic situation. We saw three dominant themes in 2023 - inflation, interest rates, and evolving geopolitical backdrop – which will remain pronounced in 2024.

1. Inflation is still sticky - A steep run-up in goods prices was the main cause behind the surge in inflation over the past 2.5 years. From energy to food to shipping, many factors that drove inflation higher in 2021 and 2022 have eased considerably this year. The tightening of monetary policies has been successful in bringing down inflation globally. However, core inflation in many countries is still above the target of the central banks. The chart below shows that inflation in many Asian countries is still not so bad. 

2. Interest rates are likely to remain high - Persistent inflation has prompted central banks worldwide to extend their respective tightening cycles. Central banks globally have remained more hawkish, and it looks like interest rate hikes are far from over. 

The US Federal Reserve held interest rates at a 22-year high on 1 November 2023 but another hike is not off the table.

3. Evolving geopolitical backdrop - Broad shifts are happening in terms of trade blocs and global value chains. Whether it is the contentious trade relationship between the US and China or the energy crisis in Europe that unravelled after Russia’s war on Ukraine, Western governments are reweighing their priorities.

They will be allocating capital toward rebuilding domestic industrial capacity. The US will prioritize narrowing its current account deficit, lifting wages, and actively using capital to defend hegemony.

4. Recession is delayed, not cancelled - Despite higher inflation and interest rates, economic activity in developed economies proved to be more resilient than expected. For one, the pandemic-related fiscal support allowed consumers to accumulate excess savings.

Second, when economies re-opened, the pent-up demand sustained the consumption patterns that rotated from goods (online buying) to services (like travel, entertainment, and eating out). However, we expect these tailwinds should dissipate as the lagged effects of monetary tightening filter through and the savings buffer that consumers have accumulated is run down.

So far, only the Eurozone and New Zealand have slipped into recession owing to two consecutive quarters of negative growth. 

What to expect in 2024?

1. The New York Fed’s recession model predicts a 60.8% chance of a US recession sometime in the next 12 months.
2. Aggressive cuts in interest rates in 2024 are unlikely, and central bank policy easing will be more gradual.
3. Europe’s economic situation appears less favorable, as PMI data indicates contraction across various sectors.
4. JP Morgan Chase Bank has included Indian government bonds in its emerging market indices. This move prompts US$ 24 billion into India’s government bond market; as the switch is made, the outside market may strengthen the rupees, thus reducing inflation and the price of the imports.
5. Despite debt and property market problems, China’s long-term growth will continue to outpace growth in advanced economies. However, domestically, the country’s property downturn will affect industrial activity and erode households’ wealth levels, exacerbating downward pressures on domestic demand. Moreover, the rising tensions between Western nations and China could severely damage the growth outlook for China’s high-tech sectors.
6. North Asian markets are likely to outperform Western developed markets, particularly in cyclical industries like semiconductors, set to improve by year-end.

How to prepare your portfolio for the next six months

Based on the above observations, it is safe to assume the markets are uncertain and choppy in the coming months. It will be better to tune your portfolios for recession. In that case, certain market sectors generate more stable and less cyclical earnings than others and can make for better defensive investments during economic downturns.

In particular, Gold has performed well during recessions except during 1981 and 1992. In 1981, the US increased interest rates aggressively, and 1992 was a mild recession where central banks sold Gold due to good macroeconomic conditions globally. In a nutshell, Gold likes inflation but not higher interest rates. The consensus is that interest rate hikes are at their peak and will start going down sometime next year.

On balance, you can build a core and satellite portfolio, with 60% of your capital allocated toward long-term opportunities like India and defensive sectors. The rest 40% can be dedicated towards asset classes keeping 1-2 years of time horizon, such as Gold, and cyclical sectors with some upside potential in 2024.

Disclaimer: While the investment recommendations here are based on my research and understanding of the macroeconomy, please do your own research before investing.