Grabbing the wheel: putting money to work

Read details of our 2024 outlook:

A structurally different world

We think higher rates and greater volatility define the new regime. It’s a big change from the decade following the global financial crisis. Investors could rely on static, broad asset class allocations for returns – and gained little advantage from differentiated insights on the macro outlook.

Today, we think the flipside is true. Production constraints abound. Central banks face tougher trade-offs in fighting inflation – and can’t respond to faltering growth like they used to. This leads to a wider set of outcomes, creating greater uncertainty for central banks and investors, in our view.

Not the typical business cycle

There’s a temptation to interpret the new regime by taking a classic business cycle view of the current environment, we believe. This misses the point: the economy is normalizing from the pandemic and being shaped by structural drivers – shrinking workforces, geopolitical fragmentation and the low-carbon transition. The resulting disconnect between the cyclical narrative and structural reality is further stoking volatility, in our view.

Managing macro risk

Seemingly strong U.S. growth actually reflects an economy that’s still climbing out of a deep hole created by the pandemic shock – and tracking a weak growth path. What matters most, in our view, is that the environment implies persistently higher interest rates and tougher financial conditions. Financial markets are still adjusting to this new regime, and that’s why context is key for managing macro risk, our first theme.

Context is everything

Job growth since 2022 has outpaced what’s typically seen in an economic expansion. But zooming out shows the economy is just climbing out of a deep pandemic hole.

U.S. payroll changes vs. typical expansion, 2022-2023 and 2019-2023

Steering portfolio outcomes

We think macro insights will be rewarded in the new regime. Greater volatility and dispersion of returns create space for investment expertise to shine, as detailed in our second theme – steering portfolio outcomes. This involves being dynamic with investment strategies, while staying selective and seeking out mispricings.

Harnessing mega forces

One way to drive portfolio outcomes is by harnessing mega forces – our third theme. These are five structural forces we see driving returns now and into the future. They have become important portfolio building blocks, in our view.

Putting money to work

On a tactical horizon, our overall macro view would keep us underweight developed market (DM) equities as a standalone because we expect growth to stay stagnant with persistent inflation, prompting central banks to keep policy rates higher for longer. But we find greater alpha opportunities in DM stocks. When incorporating the AI theme and alpha, our overall view is more neutral on U.S. equities. See the chart below. We stay positive on Japan and we keep favoring AI theme in DM stocks.

Deep dive of including the mega force overweight on overall U.S. equity view

Strategically, it is more of an income story. Our inflation view keeps us maximum overweight inflation-linked bonds. We still like income within private markets. Within DM government bonds, we stick with a preference for short- and medium-term maturities.

Investors need to take a more active approach to their portfolios. This is not a time to switch on the investing autopilot; it’s a time to take the controls. It’s important to be deliberate in taking portfolio risk, in our view, and we expect to deploy more risk over the next year.

Our investment views

Our new investment playbook – both strategic and tactical – calls for greater granularity to capture opportunities arising from greater dispersion and volatility we anticipate in coming years.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, December 2023

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2023

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2023

Adjusting to the new regime

During the Great Moderation, analyst views of expected company earnings were much more grouped together outside of major shocks. Now they are more dispersed, showing that an environment of higher inflation and interest rates makes the outlook harder to read. See the chart below.

Dispersion of U.S. equity analyst earnings estimates, 1995-2023

A more dynamic approach

We believe the new, more volatile regime rewards a more dynamic approach to portfolios. We see one-and-done asset allocations becoming less effective.

Hypothetical impact of rebalancing on U.S. equity returns

The AI mega force at work

Investor enthusiasm for AI and digital tech has offset the drag of rising yields. That has pushed U.S. tech stocks to easily outshine the broader market in 2023. We see the potential impact of AI spreading to other sectors too.

S&P tech sector vs. S&P 500 performance, 2023 year-to-date