The Adviser Issue 10 | Page 46

MARKETS & INVESTING

1 . Consensus expectations Will the consensus get it right in 2024 ? This is a loaded question because many consensus forecasts that linked economic fundamentals with asset performance got it very wrong over the past two years . Things may be different in 2024 , primarily because the initial conditions are not the same as in 2023 , making it a bit easier for the consensus to get it right . We suggest a modest neutral to overweight in equities and are closing our underweight in duration and becoming more neutral overall . We are funding these positions by reducing short-duration and cash holdings .

2 . Stock-bond correlation The deeply negative correlation of stocks and bonds has been the linchpin of the attractive risk-return characteristics of balanced , or target weight , portfolios since the Global Financial Crisis ( GFC ). This was until the 2020 pandemic , resulting in a sharp rise in correlation that limited the diversification benefits of bonds , especially vexing when bonds and equities sold off together during 2022 . Bonds had another rough year in 2023 , but as we entered 2024 , the starting valuations of global bonds look attractive to us . Crucially for balanced portfolios , we expect to see a lower correlation between stocks and bonds this year .

3 . Monetary policy A key debate entering 2023 was whether monetary policy tightening would ultimately tip the economy into recession . It did not , but the dominant theme through most of 2023 was US growth resilience and upside surprise . Even so , the risk debate entering 2024 still centred on the implications of monetary policy . We believe there are downside risks but think growth headwinds are fading and growth risks will diminish further , should disinflation continue its benign path .

4 . UK inflation We expect the disinflationary trend in the UK to remain in place for several reasons . First , wage growth is decelerating rapidly , as the labour market rebalances and the gap between labour demand and supply , which rose dramatically postpandemic , is closing and is now back at pre-pandemic levels . Meanwhile , energy and food price inflation , which have shown great passthrough effects into wage growth and core inflation over the past two years , have fallen significantly . The April Ofgem price cap is set to decrease further , providing a significant disinflation tailwind , ultimately feeding through to lower wage growth demands from workers . We see the balance of risks for the Bank of England ’ s ( BoE ) inflation forecasts skewed to the downside and believe the hawkish commentary is about to shift towards a more dovish narrative .

12

10

8

6

UK CPI Year-over-Year % -Change Contribution

Source : UK Office for National Statistics ( ONS ), Macrobond , MSIN

%

4

2

0

-2

Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23

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