Funds Congress Highlights

As we progress through 2024, asset managers face a dynamic global economic landscape. This article breaks down five critical economic trends – inflation dynamics, evolving investment strategies, equity market shifts, the growing role of private markets, and potential forecast risks. These trends are not only shaping the economic outlook for the year but also significantly influencing the asset management industry. A clear understanding of these trends is essential for asset managers to navigate risks, identify opportunities, and formulate effective strategies in this changing economic climate.

Inflation dynamics: After a bruising year of inflation-induced volatility, the pivotal question facing central banks and the markets is: to what extent do inflationary pressures remain entrenched? Sustained falls in headline inflation rates – the most visible indicator – suggest that the worst is over. Central bank policy committees clearly do not want to countenance further interest rate rises. Most market participants expect the central banks’ next move to be downwards; the main question is when.

Investment strategies: Investor sentiment has pivoted in expectation of probable rate cuts by central banks, fuelling a reawakening in the markets. As inflation concerns ease, many are asking what advantages this new world might hold. An immediate consequence is the opportunity for investors to make the most of the re-set and put their cash to work. It’s no surprise we’re hearing the mantra: “Bonds are back!” In the fixed income market, the opportunity to lock in the current level of yields on high-quality bonds looks attractive. Not only can these assets provide a healthy income stream, but there is also the added benefit of potential diversification if the growth outlook turned nasty.

Equity markets and tech innovation: A vigilant approach to the extreme valuation disparities within the equity markets would be wise, particularly in the U.S. tech sector, where AI-driven excitement has fuelled severe price distortions. Glittering promises from the tech world have a habit of not proving quite as pervasive as first promised; don’t forget, too, that it is notoriously difficult to pick the ultimate winner. Dispersion across regional markets could provide broader gains, particularly if investor interest in UK and European stocks picks up as falling inflation gives rise to renewed economic activity.

Role of private markets: While bonds can provide effective protection from growth shocks, they do little to mitigate against inflation-driven shocks. Alternative assets can be useful to plug gaps where the public markets are insufficient or unsuitable. Investors are increasingly obliged to access private markets anyway, as ambitious, fast-growing companies choose to stay private for far longer than just a few years ago. There are also opportunities to be found in sectors that thrive in inflationary environments, such as timber.

Forecast risks: The primary downside risk is that inflation concerns continue to drive market volatility. While headline inflation rates have improved, underlying pressures remain in the form of continued supply chain issues linked to the rerouting of global trade, and conflagration in the Middle East; wage growth, too, is one to watch, while political noise, much of it emerging from a pre-election United States, adds another layer of uncertainty. While it’s still too early to call the U.S. election, it’s good to remember that what politicians say and what they ultimately do may be very different. Legislative checks and balances have historically tempered much of even the most radical policy agenda.