Introduction 2024 macroeconomic outlook
Fixed income market outlooks Global credit Global fixed income Short-dated high yield bonds US municipal bonds High yield bondsEuropean corporate bonds European impact bonds Emerging market impact debt
Quality equity outlooks Global income Global equities European equities US income Asian income
Is global inflation finally under control and, if so, what might this mean for global investors and asset classes in 2024? After months of concerted efforts by major central banks to rein in inflationary pressures the picture appears to be improving. Yet with few indications banks will lower interest rates anytime soon and with some recessionary fears persisting, are global policymakers getting this delicate balance right?
This is just one of the difficult questions facing global investors as they enter a new year against a financial backdrop many still describe as a ‘new regime’. In this shifting environment, after years of intervention by central banks that fostered historically depressed interest rates, rates have returned to a higher level and appear likely to stay there for some time, according to the latest analysis by BNY Mellon Investment Management1.
So far, this changed world has helped buoy fixed income markets, driving yields upwards – albeit amid high levels of volatility and some genuine concern over falling bond prices. And despite some choppy periods, equity markets also seem to be adapting favourably to evolving economic and financial circumstance.
Yet much can change in the year ahead. Beyond raw economics and financial policymaking, geopolitics always holds the potential to deliver unexpected threats and risk. As the flaring of conflict in the Middle East demonstrates, new risks can emerge in sudden and unexpected ways in an increasingly uncertain world.
Changes in the political landscape can also have a major influence on markets and the year ahead holds the potential to surprise and disrupt. The world faces a series of key elections in 2024, including both a US presidential election and series of important elections across Europe.
With all this in mind, we asked a range of our portfolio managers – across a pool of asset classes – the following question: What do you see as the single key opportunity/threat facing your asset class in 2024? The views, outlooks and forecasts presented within this report are based on their responses.
In this report, BNY Mellon Investment Management managers from across our investment firms explore shifting political trends, broader trade and economic developments and some of the evolving risks and opportunities they are likely to present in 2024 and beyond. We hope these outlook views provide a useful snapshot of the likely shape of things to come in the months ahead.
1 BNY Mellon Investment Management. Tidal forces, dissecting the interest rate equation. November 2023.
Shamik Dhar, chief economist, BNY Mellon Investment Management
The key question we believe, is where interest rates are likely to settle down over the longer term once we've got through the current economic turbulence. In contrast to other groups such as the International Monetary Fund (IMF) or certain central banks, we think interest rates will settle down at a higher level than we saw during the post financial crisis period, between 2008 and 2019, when interest rates were basically zero.
We see reasons why the inflation compensation component of interest rates might rise. If underlying inflationary pressure is higher, we could see more nasty supply shocks of the kind experienced after Covid that tend to push prices up. Central banks could also review their inflation targets. For 10 years at least, since 2008, we spent a lot of time debating whether inflation targets were too low, i.e. whether 2% presented a risk of hitting that zero bound too often. That debate might come to the fore again once inflation is back under control.
It's ultimately a political decision, but I can see ways in which the whole apparatus of central bank inflation targeting could come into question. Even if it doesn't happen de jure, i.e. through political decision making, it could happen de facto in the sense that central banks decide the economic pain involved in getting inflation back to 2% consistently is too high. Therefore, central banks could essentially aim for something a bit higher than 2-2.5% which might allow them to keep interest rates lower than they otherwise would.
It looks like inflation has peaked in most of the major economies. It may head towards 3% or between 2% and 3% relatively quickly over the next year or so, especially if we have recessions. However, a key concern is once inflation gets into the system inflationary psychology can take a long time to undo, especially if central banks are not aggressive enough in their language to convince people they will get it back to target.
I suspect this is a bigger issue in the UK and Europe than the US. One reason is there's a lot of so-called real wage resistance in the UK and Europe. When inflation goes up, workers bid up wages and firms try to protect their margins which essentially creates an inflationary cycle or spiral. That can quickly feed into people's expectations of where inflation is going to be over not just the next 12 months, but over the medium term too. I suspect getting those expectations back to a 2% inflation target might be a bit tougher than markets think. That helps explain why interest rate expectations are now higher for longer in most economies.
Fund managers and investors are used to the idea that higher interest rates are essentially bad for bond prices because yields rise. Certainly, that's true over the short to medium term, but in many cases, particularly for longer term holders of bonds, the bulk of the investment return comes from the income component. If you hold a bond to maturity then actually the variation in its price during that time, while it affects the mark-to-market value of that bond, doesn't affect the long-term return on that bond; you get essentially what you paid for plus the coupons in between. So, in that sense it's always the income return that dominates bond returns over longer periods of time, meaning higher interest rates can be good for bondholders.