Robeco’s one-year outlook anticipates a significant shift in the global economic landscape in 2024. The Goldilocks era is drawing to a close. Decreased consumer spending and reduced corporate investment likely reflect a deepening slowdown of the G7 business cycle. The impact of continuing high rates may trigger unemployment rising to 1-2% toward 2025. Corporate and housing balance sheets are still robust, preventing a classic recession so far. China, on the other hand, is grappling with the risk of outright deflation. A continuing downward trend in home sales and house prices in China could hinder a sustained domestic consumption recovery.

Peter van der Welle, Multi-Asset Strategist at Robeco: “Contrary to market expectations, the US economy has shown surprising resilience in 2023, characterised by low unemployment and disinflation. This phenomenon, labelled ‘immaculate disinflation’, extended to the Eurozone as well. Yet, the last mile for central banks will prove the toughest. Further disinflation efforts will come at a higher cost as the trade-off between unemployment and inflation steepens at lower levels of inflation. The effective immunisation of sovereigns, corporates and households against a high real interest rate regime is set to fade. The current consensus narrative suggests a soft landing, where inflation is controlled without significantly increasing unemployment. But we believe this is overly optimistic.”

Other factors of impact

The geopolitical landscape in 2024 is complex, with important elections in the G7 countries. The rise of far-right parties, ongoing conflicts, and a fractious relationship with China contribute to a fragmenting world order, increasing economic policy uncertainty. AI adoption is seen as a potential solution for improving productivity and reducing unit labour costs. However, so far the supply-side potential from AI adoption has not yet translated into improved productivity figures.

Financial markets

In 2024, financial markets will experience tightening financial conditions. Bond yields might not have peaked, initially affecting their use as a hedge. Yield curves could steepen more due to fiscal worries, though bond-equity correlations likely will turn negative when core inflation drops below 3%. Equities face challenges like decreasing liquidity, geopolitical issues, and high interest rates. Current double-digit earnings growth projections by consensus look rather upbeat, which may trigger multiple compression. While consensus earnings forecasts carry downside risks, Europe and Japan might fare better. In the currency market, the US dollar’s high valuation may have reached a peak as the Fed approaches the cutting phase of the cycle. The dollar-yen pair is interesting due to the yen’s potential to rise.

Sustainable investing outlook

Given the significant tail risk of oil prices remaining elevated for longer in 2024 despite weakening growth, the inflection point in the performance of sustainable funds may not yet happen in 2024. In the long-term, sustainable investing is likely to thrive, driven by regulations, green investment securities, and continued societal and investor interest. Europe, the US, and other regions are currently introducing over 40 laws covering various social and environmental issues. These regulations aim for desirable long-term outcomes but can lead to increased capital expenditure or operating costs for companies in the short term. With the growing importance of sustainability both in regulation and in society, shareholders have become more active in making use of their shareholder rights. At the same time, the discussion is becoming increasingly polarised.

Masja Zandbergen, Head of ESG Integration at Robeco: “Shareholder resolutions are usually a good proxy for what institutional investors have on their minds. Climate change has captured much attention in recent years and will remain a focus topic for 2024. We see that tax transparency and artificial intelligence – topics that have long been part of Robeco’s engagement program – are also starting to gain interest from investors, next to equal opportunity, diversity and pricing policies.”