The Dynamic Planner Investment Committee (IC) met on Tuesday 23 January, coincidentally called ‘Super Tuesday’ in the US state of New Hampshire, where the race for the White House began with primary elections for the Republican party nomination. In fact, elections are expected to cover around 60% of world GDP over the course of 2024, so plenty for investors to ponder should there be promises of unfunded tax cuts, more protectionism or increased fiscal profligacy. But no doubt the ‘re-match’ in the US will be the centre of global attention.
As the impact of higher energy and food prices has subsided, and supply chains for globally traded goods have normalised, headline rates of inflation have fallen significantly over the course of 2023, but remain much higher than Central Bank targets.
The IC reflected on the still high embedded inflation expectations and the current market fixation about what the US Fed plans to do next with interest rates (following its pause announcement in November). Premature expectations of early and deeper cuts have propelled the S&P 500 to record highs, whilst earnings growth, retail sales and industrial production levels have remained flat at best.
The global economy looks set to slow in 2024, as fiscal policy starts to drag on growth and higher interest rates weigh on household and business activity, with excess savings built up during the pandemic largely spent. By stripping away the impact of the massive fiscal stimulus measures, the likelihood was that the US economy has been in intermittent periods of recession during 2023.
The US and Global government bond yield curves remain inverted, and interest rate normalization is required as high non-transitory inflation expectations persist. With slow growth, lower tax revenue, eye-wateringly high government debt and fiscal deficits, and Central Banks unwinding their balance sheets with QT, there will be a rising supply of bond issuance at a time of declining investor sentiment / demand. Hence the curve is expected to steepen at the longer end, resulting in negative real bond returns into the foreseeable future. The risk of greater economic volatility and a potential global government debt crisis persists, despite recent market optimism.
The IC discussed the potential of AI (particularly generative AI tech) on productivity and employment, with echoes of a potential ‘dot.AI’ bubble, given the 25% concentration of the US stock market in the ‘Magnificent 7’ tech stocks. As AI will help drive robotics and accelerate onshoring, the implications of a diminishing competitive advantage for China and emerging markets were noted.
There were no changes made to this quarter’s capital market assumptions, which follows a consistent process of long-term analysis. In preparation for the annual strategic allocation review later in the year, the IC reviewed ongoing analysis of additional asset classes / risk factors to be potentially included in the model. It continues to ensure that the markets and instruments being used by our asset management clients are accurately represented in Dynamic Planner.
Read the full Q1 2024 analysis from the Dynamic Planner Investment Committee.
