Morningstar Wealth has published its 2024 outlook this week, with insights from Dan Kemp, global chief investment officer at Morningstar Investment Management, and Preston Caldwell, chief US economist at Morningstar Research Services.

Morningstar Investment Management's EMEA chief investment officer Dan Kemp highlighted this week how 2024 will be a blend of caution and optimism.

“For those in the UK, Europe, or the Middle East, the investment arena may appear daunting given recent market volatility. Yet we see investment opportunities emerging,” Kemp said in a statement. “Periods of market volatility and pessimism should not be seen as a barrier to investment but rather are a normal part of the journey to reach financial goals.” 

Economic outlook
“In the case of the US, the economic outlook is on the optimistic side – relative to expectations – with respect to US GDP growth and inflation for the next several years,” Morningstar’s chief US economist Preston Caldwell said. He expects GDP growth to slow in 2024, owing to the lagged effects of Federal Reserve rate hikes, along with more cautious consumers as household excess savings deplete. “But, slowing growth along with normalising inflation could induce the Fed to begin cutting rates aggressively in 2024,” Caldwell added.

He expects monetary loosening to drive a strong GDP growth rebound over 2025 to 2027, which will also be facilitated by supply side expansion in terms of labour supply and productivity.

Caldwell expects inflation to return to the Fed’s 2 per cent target in 2024 and stay there in the following years. “The supply constraints that caused a surge in inflation in 2021 to 2022 are now alleviating. This allowed inflation to fall dramatically in 2023 despite an acceleration in GDP growth. This process still has much room to run,” he continued.

He sees US inflation normalising in 2024 and remaining low, and GDP growth to eke out a small positive number in 2024, then pick up. Caldwell also expects the Fed to cut interest rates meaningfully in 2024 and 2025.

“Across the pond, Europe remains more fragile economically,” he added. "Economic growth has been essentially flat since Covid, with the eurozone now likely to be in a technical recession.” 

“Sentiment readings have been screening negative for some time now. Wage inflation has not risen as strongly as in the US, meaning that consumers are left particularly cash strapped, which is pressing heavily on consumer spending,” Caldwell continued. 

“Inflation has fallen materially from the double-digit levels of late 2022, but remains well above central banks’ targeted levels. With the European Central Bank and the Bank of England projecting that inflation will remain high in 2024, central banks are walking a tightrope between reducing inflation and strangling a struggling economy,” he said.

Portfolio allocation
Kemp sees positives in this environment. His top takeaways includes having a robust portfolio. He likes longer-term bonds more than he has in a decade, but he is prepared for surprises, which is why short duration bonds still factor into his portfolio construction. He believes that increasing return prospects within fixed income make it a more compelling opportunity, but select equity markets still offer more attractive returns.

“The key to successful investing lies in maintaining a long-term view, applying diligent risk management, cultivating solid savings habits, embracing fundamental change and adopting a goal-oriented investment approach,” he added.  

In conclusion, the firm said it is cautiously optimistic for both stocks and bonds in 2024, even accounting for heightened risk. In equities, it sees opportunities in size, style, sector, and country exposures. Targeted exposure is well placed to beat broad market-weight exposure, according to their analysis.

For bonds, the firm sees broad appeal across different maturity profiles. Government bonds are its preferred exposure. Corporate bonds are priced for a slowdown, but not a recession, so it makes more sense for shorter maturities. Morningstar Wealth also believes that European bonds looks decent, but its preference is for US Treasuries, with the balance of probable outcomes for yields leaning towards falls. Short-duration bonds are attractive for cautious portfolios, adding healthy income with appropriately lower duration risk, the firm added. It believes that the US dollar looks expensive versus other major currencies.

The firm is not alone in its views. HSBC Global Private Banking  and UBS Global Wealth Management also see high-quality bonds as an attractive investment opportunity in 2024. See more here and here.

Morningstar Wealth also thinks that artificial intelligence (AI) is an exciting theme and it expects a lot of market interest in 2024. “One effective way to access the AI theme without paying huge valuation premiums is via second-derivative plays. These are not the chip makers or those that offer technology interfaces, but rather, those who can effectively embed AI into their workflow and drive new revenue growth opportunities,” the firm said.