The Swiss firm explains its asset allocation ideas and economic assumptions for the following year. Among its specific ideas is the view that the US economy is likely to slow rapidly in 2024, while Europe could surprise investors on the upside.

Pictet Asset Management is keeping to a defensive bias for 2024 because it expects sluggish growth in developed countries and inflation to fall but remain above central banks’ targets.

Asian emerging markets will lead outperformance of emerging over developed markets next year, while a decline in correlations between equities, bonds and other assets means that multi-asset diversification makes sense, the Swiss firm said in its outlook for 2024. 

“Returns next year on a balanced portfolio – after inflation – in 2024 will be about 3 to 4 per cent, which isn’t that bad,” Luca Paolini, chief strategist at PAM, told journalists in a briefing on its outlook late last week. “The appeal of a multi-asset portfolio is much higher now.”

After the 60/40 equities/bonds split of portfolios – a traditional asset allocation stance – got thumped in 2022 when interest rates rose, it looks as though this is delivering returns in 2023, Paolini said.

In other comments, Paolini, talking alongside Arun Sai, senior multi-asset strategist, said that geopolitical risk is unlikely to diminish in any meaningful way, with the countries accounting for half of the global output holding elections during the year, which is likely to result in a slight increase in market volatility.

“The economic environment is not particularly promising: stagnating growth in developed economies, rising unemployment and inflation that refuses to return to central bank targets will be key features of the investment landscape,” Paolini and Sai said.

Pictet Asset Management forecasts developed economies to post inflation of 2.7 per cent next year, coming down from 4.7 per cent. 

Falls in inflation will not trigger a bout of rate cuts, PAM warned: “With central banks still smarting from letting inflation get out of control, unless significant progress is made towards target, they are unlikely to enter into an aggressive easing cycle.”

The Swiss firm said the Bank of England looks likely to be the first major central bank to cut rates and the threat of recession could mean that the BoE starts to ease as early as May. 

“The US Federal Reserve will be more cautious than the market currently expects, but [we] still see it trimming twice in the latter half of the year and the European Central Bank doing the same,” the firm continued. 

Pictet thinks the biggest global economies will avoid recession, predicting that developed economies will grow by 1.0 per cent after expanding by 1.6 per cent in 2023, with the US slowing to 0.9 per cent from 2.4 per cent growth .

Emerging world
“In the emerging world, economic conditions will be considerably better. We see emerging market economies posting robust growth of 4.0 per cent, up from 3.8 per cent in 2023 and 2.8 per cent in 2022, which is likely to be underpinned by China’s recovery from this year’s low point,” Pictet Asset Management said. 

“As nominal economic growth slows in the developed world, so will corporate earnings growth – particularly during the first half of the year. Even with a rebound later in the year, we expect global equity returns of around 5 per cent for the year, down from 15 per cent in 2023,” the firm said. 

Bonds, by contrast, should benefit from the drop in inflation and a start to the easing cycle of the central banks. We see global bond yields dropping by around 50 basis points, which should deliver investors a 7 per cent total return from basically zero per cent so far this year, Pictet Asset Management said. 

Shifts
The firm said the US economy will slow “dramatically,” but Europe is likely to “beat investors’ gloomy expectations.”

“With equity valuations depressed within the single currency zone, European stocks have a solid prospect of outperforming during the coming year. Meanwhile, although robust economic growth in emerging markets bodes well for stocks there, risks centring on China – the economy is only slowly recovering and remains vulnerable to its highly leveraged property market – tilts us in favour of EM [emerging market] bonds,” the firm said.

Additionally, Pictet Asset Management said gold prices should be “well supported” by a weak dollar and peak in US interest rates and lingering geopolitical risks.