The post-Covid economic cycle was always likely to move into a ‘Year of Transition’ and it increasingly appears that 2024 will be that year. But what do we mean by that?
Put simply, policymakers and investors will have to determine whether we are likely to gradually move back to pre-Covid conditions of low growth/low inflation/loose monetary conditions or if a hard landing and the resultant fear of deflation – with a return to ultra-loose monetary conditions – is more likely?
Alternatively, there is a possibility that growth will gain momentum, resulting in a second wave of inflation and even tighter monetary conditions.
Currently, economic indicators increasingly suggest lower growth and inflation, but with risks of a harder landing in some countries. Significant external factors such as wars in strategic regions, geopolitical tensions, and elections in the US, UK, and India further complicate this transition period. In the background the issues of low productivity, poor demographics, a rising healthcare burden and high debt levels hampering many developed economies will continue to impact growth and the potential path for monetary policy. Conversely, there are exciting developments including Artificial Intelligence (AI) and the global transition to a greener world on economic activity.
The Covid disruption has given way to both familiar challenges and new opportunities.
Robert Rubin, in The Yellow Pad, states that “addressing moments of disruption as a group helps you realize not just what has changed, but what has remained the same” – a simple statement highlighting the need to uphold basic decision-making norms amidst uncertainties and challenges.
As fund managers, we have had to navigate a political landscape with uncertain and challenging economic policy, steering asset allocation to capture opportunities for significant asset gains, while staying mindful of the pitfalls and the increasing risk of the Central Banks getting it wrong.
We made an early move to overweight fixed income allocation and have stuck to this decision. Within fixed income we also raised the duration of bond portfolios ahead of the Fed “pivot” to capture capital gains while focussing on higher quality companies and senior financials to lock in higher income for longer to optimise income and capital gains. This remains a central plank of our strategy.
Within equities, we retain our focus on quality companies that can withstand difficult economic conditions but also benefit from sensible valuations. Additionally, the Growth Plus equity exposure provides potential benefits from lower bond yields.
To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q1 2024 here.
