Australia Strategy: Asset Allocation Update – 2024 Outlook
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 07 December 2023, 12:00 PM
- Sectors Covered:
- Equity Strategy and Quant
- A rapidly evolving investment landscape and a year of likely political uncertainty make forecasting difficult in 2024. We outline three possible scenarios and investment implications for asset allocation.
- 1) Economic soft landing involves a modest deceleration below trend in major economies, without significant shocks disrupting markets. The decision to maintain higher interest rates will bring inflation near central banks' target range. This would enable a shift towards reducing interest rates, alleviating the strain on households and companies.
- 2) A cyclical slowdown / mild recession resilience driven by fiscally supported consumers and companies has been the biggest surprise of 2023, but barring something extraordinary, next year could see the global economy finally turn lower. Inflation would be sticky for a period before returning to target, with interest rates staying higher for longer periods, resulting in bouts of asset price volatility.
- 3) Economic hard landing/balance sheet recession will be defined by a sharp downturn in the global economy. A sharp acceleration in corporate defaults would significantly reduce corporate and consumer spending. Central banks would respond by cutting interest rates as growth and inflation fall away.
Our base case remains a cyclical slowdown / mild recession
We expect economic growth to contract in the first half of 2024 before returning to growth later in the year. Sticky inflation will keep interest rates higher for longer. Equities will likely remain rangebound until there is more certainty on the interest rate trajectory either peaking/falling. This scenario could have an interesting dynamic around small and mid-cap stocks.
These companies were derated in 2023 as they grappled with higher interest rates, and their risk-reward profile looks attractive despite the recession risks. With central banks on high alert for persistent inflation, short-dated, high-quality credit should form the core part of the fixed income allocation.
A mild recession would be positive for property because a small amount of inflation is positive for real estate. Furthermore, REIT prices have declined materially, which could lead to opportunities in areas that investors have overlooked in 2023 (retail/commercial REITs).
Assessing the risk of a soft landing / hard landing scenarios
The path of interest rates, together with inflation and growth trajectories, will look vastly different in each scenario and will inevitably be subject to high levels of uncertainty both in terms of duration and end points.
An economic hard landing will prompt widespread cuts to spending by companies and consumers resulting in a lengthy default cycle. Here USD, high quality sovereign debt and non-correlated alternatives will provide some cover.
The focus is on duration, defensiveness, and sustainable incomes. Conversely, a soft-landing scenario will see the economy hold at slightly below trend growth and inflation, providing central banks ample opportunity to cut interest rates to steer their economies back to growth in late 2024.
A soft landing would be a risk-on scenario and good news for risk assets with a preference for riskier assets such as Emerging Markets, Resources and Mid/Small cap companies, while underweighting Defensive assets.
Changes to our 2024 allocation
We lower cash to increase our Real Assets (REITs and listed infrastructure) allocation and reduce our underweight to Global Equities. We hold an underweight position Australian equities and neutral fixed interest.
See our asset class views for more (page 2). Expect market narratives to shift rapidly. Prepare for shorter cycles. A volatile macroeconomic environment demands vigilance.
Figure 1: Q1 2024 Asset Allocation – Tactical Tilts
Source: Morgans Financial, Company
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