When preparing forecasts for the following year, analysts often have the same concern: wondering what geopolitical or standard deviation event could influence future forecasts and potentially be the punch that knocks one’s head. The same thing happened last year, but expectations of a tactical change were largely realized.
Jason Xavier, head of EMEA ETF Capital Markets at Franklin Templeton, believes 2024 will see greater macroeconomic volatility as the duration of trade continues. Albeit in reverse. This macro uncertainty is the current anchor influencing stock and bond markets globally. Xavier therefore believes that volatility could favor a more pragmatic approach to investment management over the next year.
In November 2023, global inflation registered a consistent decline, aligning with projections. Notably, European stock market indicators in early December signaled an anticipation of substantial interest rate cuts. They projected a 150-basis point reduction by the European Central Bank in 2024.
This set the stage for an impending easing of monetary policy, prompting a crucial question: when will this materialize? The trend is mirrored by central banks, such as Brazil’s, which initially raised rates but are now swiftly backtracking.
This apparent about-face raises a ‘red flag’ on the efficacy of certain economic policies. The spotlight now pivots to the economic ‘landing,’ where even a marginal uptick in unemployment rates in the United States and Europe becomes a pivotal indicator, hinting at a potential softening of the labor market and a looming hard landing, possibly triggering a recession.
Against the backdrop of this anticipated economic downturn, Xavier asserts that fixed income will regain prominence this year. Especially emphasizing duration and credit worthiness.
Jason Xavier said: “Our outlook foresees an uptick in net inflows towards bond ETFs with extended durations and robust credit quality throughout 2024. Emphasizing an active approach to bond investing, we advocate for a strategic response to the prevailing volatility.”
He added: “Furthermore, we anticipate that bond offerings integrating a ‘green’ filter – aligned with sustainable investment principles – will capitalize on the positive momentum currently propelling environmentally conscious investment opportunities.”
As Xavier anticipates the implementation of accommodative policies by central banks in 2024, two distinctive scenarios come into focus. In the first scenario, he and his team foresee a potential weakening of the US dollar. This would create a conducive environment for the redirection of capital flows toward emerging market economies.
Xavier said: “These economies, which have faced recent challenges in attracting foreign investment, stand to benefit. Specifically, select EM nations, exposed to both domestic and export growth, are poised to outperform.”
In the alternative scenario, caution is warranted, acknowledging the counter-argument that in a ‘risk-on’ environment, alternative investment options may outshine emerging market investments. These alternatives include quality fixed income, the ‘Magnificent Seven,’ or the S&P 500 Index, known for its strong growth orientation.
Xavier explained: “In alignment with the first scenario, our focus shifts to markets demonstrating growth and value potential-termed as ‘rough diamonds.’ We express a bullish outlook on emerging economies where the technology sector holds substantial weight. Examples are Taiwan and South Korea. These Nations, with a robust presence in the semiconductor industry, will capitalize on advancements in artificial intelligence (AI) development.”
India emerges as a key market of interest, driven primarily by its long-term potential. The demographic strength of its population positions India as a pivotal player. Not only as a potential outperformer within major emerging market indices – alongside Brazil and South Korea – but also on a global scale.
The head of EMEA ETF Capital Markets at Franklin Templeton added: “Consequently, we advocate for an active and tactical approach in managing a broad emerging markets strategy. Leveraging individual low-cost markets as structural elements, we recommend building over/underweight positions relative to the broader benchmark.”
Xavier said: “I firmly assert that we stand at a societal crossroads. We’re experiencing a transformative era that rivals some of the most groundbreaking periods in our brief history. In fact, the swift advancements in AI, particularly the recent strides in generative intelligence, mark a profound revolution akin to the significance of the agricultural or manufacturing revolutions of the past.”
He added: “Recognizing the rapid pace of this evolution, propelled by the self-directed progression of AI, it becomes imperative to explore potential investment opportunities.”
Thematic investing strategically captures enduring trends, focusing on high-growth sectors in the midst of unprecedented transitions. In healthcare, the world witnesses groundbreaking advancements, from innovative disease prevention methods to state-of-the-art tools supporting surgeries-underscored by the global challenge of an aging population.
Moreover, cutting-edge technologies are imperative in addressing global macro challenges. Among there is the urgent need to combat climate change, droughts, and famines.
Xavier said: “These opportunities, tethered to overarching global themes, foster growth in burgeoning sectors like artificial intelligence and technology. They also seamlessly complement the evolution of core sectors like food and healthcare, catalyzing transformative change.”
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