Actionable ideas for a world in transition

Outlook 2024Actionable ideas for a world in transition

Macroeconomic outlook

Although 2023 was a better year for investors than 2022, the macroeconomic outlook remains volatile and challenging. Inflation is still above central bank targets, developed world gross domestic product (GDP) growth is slowing, recession risks are high, and geopolitical risk is on the rise. However, volatility creates opportunity for investors.

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Macroeconomic regime is changing theme icon

Macroeconomic regime is changing

New fundamental trends and political dynamics are transforming the economic landscape.

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Geopolitical risk is back theme icon

Geopolitical risk is back

Around the world, geopolitical tensions and volatility continue to mount significantly.

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Indicators signal growth concern theme icon

Indicators signal growth concern

Potential for US recession remains on the horizon.

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The macroeconomic backdrop remains volatile and challenging. In our last two Outlooks we talked about how the world has gone through “macroeconomic regime change,” with the world of low and stable inflation, and ever lower interest rates, a thing of the past. Events over the last year have only added to our conviction that we are indeed in a new world, where the fundamental economic and political dynamics at work are different than they were in the three decades before COVID-19.

Investors have been challenged the last few years

Macroeconomic regime is changing chart

*Portfolio consisting of 60% equities (represented by S&P 500 Index) and 40% bonds (represented by 10-year US Treasury bonds).

Sources: Robert Shiller online data, Yale Department of Economics, accessed November 15, 2023; Macrobond (November 2023).

Geopolitical risk and global volatility have clearly been on the rise. We are more generally in a world of greater risk and uncertainty, in our view. Part of this is the fading of the post-1989 unipolar world. But the more significant point is that we have entered into a period of great-power rivalry between the US and China and this is likely to be long-lasting.

Geopolitical risk is back

Geopolitical risk is back chart

Source: Data downloaded from Matteo Iacoviello Geopolitical Risk (GPR) Index on November 15, 2023.

The yield curve remains inverted, monetary aggregates have slowed sharply, and credit conditions have tightened. Yield curve inversions have often preceded recessions, and the US yield curve first inverted back in April 2022, which is 21 months ago now. If the US economy were to enter a recession anytime in the next four months it would be a historically normal outcome.

US yield curve inversions often precede recessions

US yield curve inversions often lead recessions chart

Source: Macrobond (November 2023).

5 Actionable ideas for 2024

Growth actionable idea icon

Focus on quality in growth equities

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Municipal Bonds actionable idea icon

Capitalize on historic municipal bond yields

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Fixed Income actionable idea icon

Allocate with conviction across taxable fixed income

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Artificial Intelligence actionable idea icon

Prepare for the growth of artificial intelligence

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Energy Transition actionable idea icon

Explore emerging opportunities in energy transition

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Outlook 2024 webinar

Hear from our panel of investment experts as they discuss actionable investing ideas that can help investors navigate the uncertainty and capitalize on opportunities in the months ahead.

Listen to our podcast

We expect 2024 to be a year of transition and opportunity for investors. Listen to Head of Research Daniel McCormack, and Economist Derek Hamilton discuss the macroeconomic outlook for the year ahead.

Message to investors

In our experience, volatility and uncertainty – while not necessarily welcome – can create opportunities. While we acknowledge the challenges of the current environment, we take a nuanced view across markets and asset classes and remain optimistic when it comes to our ability to find near-term opportunities for investors.”

Ben Way

Group Head, Macquarie Asset Management

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Past performance does not guarantee future results.

Diversification may not protect against market risk.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt. This includes prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

Currency risk is the risk that fluctuations in exchange rates between the US dollar and foreign currencies and between various foreign currencies may cause the value of an investment to decline. The market for some (or all) currencies may from time to time have low trading volume and become illiquid, which may prevent an investment from effecting positions or from promptly liquidating unfavorable positions in such markets, thus subjecting the investment to substantial losses.

Credit risk is the risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower expects to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation. Credit risk is closely tied to the potential return of an investment, the most notable being that the yields on bonds correlate strongly to their perceived credit risk.

Investors must have the financial ability, sophistication/experience, and willingness to bear the risks of an investment in private market securities. Such securities may be available only to qualified, sophisticated investors, may have liquidity constraints, and may bear the risk of investment in private markets securities.

Private market investments may entail a high degree of risk and investment results may vary substantially on a monthly, quarterly or annual basis. Among many risk factors, some are particularly notable. These include, without limitation, the general economic environment, the health of the housing market, employment levels, the availability of financing, the quality of servicing the assets backing the securities, the seniority and credit enhancement levels for structured securities, government actions or initiatives, and the impact of legal and regulatory developments. Additionally, private markets strategies may represent speculative investments and an investor could lose all or a substantial portion of their investment.

International investments entail risks including fluctuation in currency values, differences in accounting principles, or economic or political instability. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility, lower trading volume, and higher risk of market closures. In many emerging markets, there is substantially less publicly available information and the available information may be incomplete or misleading. Legal claims are generally more difficult to pursue.

Investment strategies that hold securities issued by companies principally engaged in the infrastructure industry have greater exposure to the potential adverse economic, regulatory, political, and other changes affecting such entities.

Infrastructure companies are subject risks including increased costs associated with capital construction programs and environmental regulations, surplus capacity, increased competition, availability of fuel at reasonable prices, energy conservation policies, difficulty in raising capital, and increased susceptibility to terrorist acts or political actions.

Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

A sector is a segment of the economy that includes companies providing the same types of products or services. Although companies within a sector tend to be reasonably consistent in their fundamentals, these fundamentals may differ substantially from one sector to another. For example, some sectors are cyclical, rising and falling with changes in the economy while others are defensive, maintaining their strength despite economic ups and downs.

A Treasury yield refers to the effective yearly interest rate the US government pays on money it borrows to raise capital through selling Treasury bonds, also referred to as Treasury notes or Treasury bills depending on maturity length.

The shape of the yield curve is closely scrutinized because it helps to give an idea of future interest rate change and economic activity. There are three main types of yield curve shapes: normal, inverted and flat (or humped). A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. A flat (or humped) yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition. The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short- and long-term rates.

Yield curve inversion is when coupon payments on shorter-term Treasury bonds exceed the interest paid on longer-term bonds.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the US stock market.

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

Economic trend information is sourced from Bloomberg unless otherwise noted.

All charts are for illustrative purposes only. Charts have been prepared by Macquarie Asset Management unless otherwise noted.

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