Inflation outlook still calling the shots

Central banks are playing a pivotal role in shaping the economic landscape, with a delicate dance between interest rate adjustments and efforts to maintain economic growth and financial stability. Investors are keenly monitoring signals from major central banks as they navigate the fine line between bringing inflation back down towards the 2% targets while still supporting growth and avoiding a hard landing. At the time of writing, consensus opinion is that the peak in rates has been achieved and that Central Banks will start to ‘pivot’, i.e. lower interest rates, in 2024.

Against this backdrop, economic growth mostly remains healthy. The three main regional drivers of growth are currently the US, Europe (including UK) and China. The US exceeded the Fed’s long-term GDP growth estimate with a 5.2% growth in Q3 2023. Growth in China remains healthy, with the IMF forecasting China’s real GDP growth in 2024 of 4.2%. However, the picture in the Euro Area and the UK is less robust, with the IMF forecasting growth of 1.2% and 0.6% respectively for next year. These differences highlight the need for an asset allocation framework adjustable to regional settings.

After the post pandemic recovery boost, corporate earnings growth expectations are lower but still in positive territory. Data from FactSet indicates that companies are comfortably beating analysts’ estimates. Looking ahead to 2024, current consensus estimates point to an expected annual US company earnings growth rate of over 11%. The operating environment is also becoming more favourable: post pandemic supply chain disruptions have ceased and trade volume growth of 3.3% in 2024 is expected, compared to 0.8% in 2023, according to the WTO (as of October 2023).

Geopolitical factors continue to exert significant influence on markets. Trade tensions, regional conflicts, and diplomatic relations shape market sentiment and contribute to volatility. The evolving dynamics between United States, China, and Russia are creating a backdrop of uncertainty that investors must carefully assess. The energy landscape is another key consideration. As countries balance energy security, environmental sustainability, and economic growth, changes to energy policies could impact industries ranging from oil and gas to renewables.

The new age of AI took a step forward with the launch of ChatGPT in November 2022. ChatGPT is a large language model based chatbot developed by OpenAI, allowing users to generate media (be it text, code, pictures and more). By January 2023 it had over 100 million users per month and was the fastest growing consumer software application in history. Investor attention turned to the enablers of AI, particularly those focused on designing the necessary hardware it requires: Nvidia, the US chip designer, has risen by more than 200% year to date. The key question for markets is what the potential size of the productivity gains across the broader economy are. The US National Bureau of Economic Research looked at a staggered introduction of a generative AI-based conversational assistant increased productivity per hour by 14% on average among customer support agents. If realised more broadly, these gains may help mitigate higher interest rates and wage costs.

Given the uncertain outlook, investors must remain vigilant to risks and challenges. Inflationary pressures, supply chain disruptions, and the potential for policy missteps remain a concern. Geopolitical tensions, including trade disputes and regional conflicts, will continue to create market volatility. Additionally, the pace of technological change introduces both opportunities and risks, requiring investors to stay informed and adaptable. Navigating the prevailing uncertainty and position portfolios for a variety of different economic outcomes will be key. The following pages will hopefully give you confidence that we are well positioned, staying invested and remaining balanced.