BNY Mellon Investment Management discusses the economics and investment outlook in 2024 and the allocations that plays well to a backdrop of receding recession risks and easing cycles on the horizon.

Shamik Dhar, chief economist at BNY Mellon Investment Management, is more optimistic, albeit cautiously, about the economic trajectory in the coming months. This more favourable view towards risk assets is reflected in upgrades to the firm’s equity stance. 

Dhar said the firm has upgraded its equities stance, based on receding recession risks, ongoing disinflation, and the start of policy easing cycles, which provide a more supportive backdrop. His regional preferences are for the US and Japan. However, he has also turned more positive on European (ex-UK) equities in the expectation of positive earnings' revisions, and an improvement in multiples over the next 12 months.

Enthusiasm for artificial intelligence also supports his more optimistic equity view. The firm’s research into AI’s potential equity impact led to increased estimates for potential upside, particularly for US equities, he said.

Dhar also notes that while markets have quickly priced in AI benefits for a handful of big tech names, the theme is much broader. Of course, the AI tailwind may fizzle out or take much longer to deliver on promised labour productivity gains, but he thinks there is a strong argument for the market pricing in AI’s impact across sectors sooner than sceptics believe.

In the UK, cheap valuations imply minimally less bad news and could cause markets to re-rate, he added. However, the sectoral composition of the index is unhelpful, and an improving economic outlook is supporting sterling – a headwind for UK large caps with a large share of non-sterling earnings. Dhar consequently has a preference for UK small caps.

His view on fixed income is moderated as a falling recession risk translates into a lower probability of aggressive central bank policy cuts. “While income returns remain very attractive, it is likely the pace of rate cuts will be more gradual, which limits the possibility of a vigorous rates rally,” Dhar said. He advocates for gradually extending duration of fixed income portfolios to lock in attractive multi-year rates and hedge against unexpected severe growth slowdowns. Given tighter-than-average credit spreads, he favours sovereign debt and higher quality credit exposure.

“Our forecasts paint a picture of moderating, but unlikely recessionary, growth, paired with disinflation, and near-term central bank policy cuts. This backdrop, despite regional variations, is broadly positive for risk assets,” Dhar said.

“Our outlook for equities is modestly positive, hence our cautiously risk-on approach. Cautious because the downside risks, though lower probability, are relatively large in magnitude. AI enthusiasm plays into our optimism, alongside the increasing likelihood of a soft landing,” he added. 

“Fixed income continues to play an important role in multi-asset portfolios, offering a decent income return, even if nominal short rates fall and because, at higher yields, it can play the hedging role in a multi asset portfolio it is supposed to,” he continued. "Of course, tail risks remain, not least the possibility of escalation of geopolitical conflicts, or from a surprise election result in one of the many taking place worldwide this year.” 

Other wealth managers are also positive on US and Japanese equities in 2024. Michaël Lok, group CIO and co-CEO asset management at Swiss private bank Union Bancaire Privée favours Japanese equities in 2024. While Goldman Sachs recommends that clients stay invested in US equities at their customised strategic asset allocation weight and do not shift towards bonds, cash or non-US equities. See more commentary here and here.