With interest rates globally expected to fall in 2024, investors are highly attuned to how markets will affect their portfolios — and how they can take advantage of shifting dynamics.
WTW is telling allocators to expect a year marked by dispersion, both between geographies and between asset classes. According to a new analysis from the consultant, “Divergence is one of our major economic and capital market themes for 2024.”
Starting with the U.S., WTW is pricing in the potential for two scenarios. As the Federal Reserve lowers policy rates this year, core inflation may not fall as quickly as investors expect. The other possibility is that the Fed may keep policy more constrained than expected, which could push the economy into a small-scale recession.
What that means is more variation in U.S. stock returns, says the consultant.
In Europe, meanwhile, WTW is predicting slower GDP growth and overall higher volatility. The continent could be the first region where the central bank chooses to lower interest rates.
And WTW is targeting a 4.8 percent GDP growth rate for China in 2024. Since the pandemic, the country’s GDP growth has been more uncertain. Growth dipped in 2020, then spiked in 2021, and then declined again in 2022. Last year it jumped slightly.
To cope with the changing macroeconomic environment, WTW expects that a portfolio with a tilt to government bonds, equity alpha, and other uncorrelated sources of alpha will be an investor’s best bet at success.
The correlation between equities and bonds is expected to fall in 2024, which will illustrate the benefits of diversifying between the two once again. Although investors have been putting capital into cash in recent years — $1.3 trillion in 2023 alone — WTW predicts that interest rates globally will fall in 2024. This may make other asset classes more attractive in the coming months.
Given the uncertainty in the year ahead, WTW suggests that downside risk hedging could be a useful portfolio tool. According to the firm, government bonds could help protect investors against growth risk.
A simple 60/40 portfolio turned in a strong performance in 2023, but that may not be the case this year. WTW expects higher asset class dispersion in 2024, which means there are more chances to capture alpha — as long as allocators are in the right investments.
To find uncorrelated returns, investors should look for positive market dynamics, impediments to cash flows, and how difficult a strategy is to scale.
Not surprisingly, WTW suggests that private debt, which encompasses a broad range of strategies, could be an attractive diversifier. Niche opportunities in real assets, and uncorrelated hedge funds may also be useful tools for investors in 2024.