The 2024 fiscal forecast according to Morningstar looks something like this:<\/p>\n
Heaps of risk, very high stakes \u2013 but with a decent smattering of \u2018cautious optimism\u2019 for stocks, bonds \u2026and that the world probably won\u2019t end.<\/p>\n
This year\u2019s annual take on what happens next year has Morningstar\u2019s best offering both a comprehensive and also a slightly upbeat assessment of the global economic outlook and the impact that\u2019ll have on its various markets for 2024.<\/p>\n
It could be game on, they say \u2013 but with one important caveat:<\/p>\n
Yes, there are stars aligning for the morning of 2024, but the dangers are more widespread and the stakes just keep getting higher.<\/p>\n
I mean, how\u2019s this for a come-thither-but-stay-back of an intro:<\/p>\n
As we stand at the threshold of 2024, it\u2019s essential we remind investors that the presence of uncertainty does not imply a scarcity <\/em>of opportunities. <\/em><\/p>\n Our approach to the year will be a blend of caution and optimism.<\/em><\/p>\n For those in Australia, and Asia Pacific more generally, the investment arena may appear daunting given recent market volatility.<\/em><\/p>\n Yet we see investment opportunities emerging. <\/em><\/p>\n Periods of market volatility and pessimism should not be seen as a barrier to <\/em>investment but rather are a normal part of the journey to reach financial goals.<\/em><\/p>\n With an eye on a beleaguered global macroeconomic backdrop, the Morningstar report put forward its \u2018base case\u2019 for investing in the new year.<\/p>\n \u201cWe are cautiously optimistic for both stocks and bonds as we enter 2024, even accounting for heightened risk,\u201d Morningstar CIO Asia-Pacific Matt Wacher told Stockhead<\/em>.<\/p>\n There\u2019s those universally higher interest rates and the emerging influence of increasingly tougher debt servicing commitments. And there\u2019s the rising pressure that\u2019s placing on indebted households.<\/p>\n \u201cHigh savings buffers and low unemployment have supported growth, but the consumer is showing signs of fatigue as revealed by falling retail sales and consumer confidence,\u201d says Matt.<\/p>\n Source: OECD and ABS. As of October 31, 2023.<\/em><\/p>\n \u201cWhile the risk to a recession is alive, it is not our base case.<\/p>\n \u201cThe Australian economy will continue to flatline, with falls in GDP per capita occurring over the first half of 2023 despite relatively low unemployment levels,\u201d Matt says.<\/p>\n \u201cWe also think it is plausible for many central banks to cut rates from mid-2024 and into 2025 although these central banks will continue to walk a tight rope between reducing inflation and strangling a struggling economy.\u201d \u30df\u2730 We expect further economic change in 2024. <\/em><\/p>\n That\u2019s to say the global economy remains fragile. Against this backdrop, the analysts reckon \u2018it is plausible\u2019 for many central banks to cut rates from mid-2024 and into 2025.<\/p>\n \u30df\u2730 Questions around potential recession risks and the inflation outlook will likely persist as some economists still see a high chance of a recession in the next year.<\/em><\/p>\n Morningstar says that developed world central banks, including the RBA, are walking a tight-rope between reducing inflation and strangling a struggling economy. They warn that there\u2019s a wide range of potential outcomes around the \u2018base case.\u2019<\/p>\n \u30df\u2730 Among equities, valuations present us with opportunities. <\/em><\/p>\n Morningstar\u2019s Matt Wacher says that by \u2018looking for undervalued areas of the market\u2019 investors can \u2018add robustness\u2019, with defensive stocks of particular interest.<\/p>\n \u30df\u2730 Certain scenarios pose a challenge to any \u2018base case\u2019 assessment. <\/em><\/p>\n Right now, known risks include geopolitics and the impact that has on the oil price, for example.<\/p>\n \u30df\u2730 The Australian economy continues to flatline, with falls in GDP per capita occurring over the first half of 2023 despite relatively low unemployment levels. <\/em><\/p>\n As higher interest rates have increased debt servicing commitments, the disposable income of indebted households is under pressure. The savings buffer from massive fiscal stimulus programs in 2020 and 2021 has depleted and household consumption is being curtailed.<\/em><\/p>\n \u00a0<\/p>\n \u201cHowever,\u201d Matt adds, \u201cour scenario analysis sheds light on various potential outcomes that are currently unknown too, offering a perspective on non-normal scenarios that can greatly influence investment decision- making.<\/p>\n \u201cDefensive equities and a mix of bond holdings feature as core assets to manage these risks.\u201d<\/p>\n Based on Morningstar\u2019s \u2018scenario testing,\u2019 the key portfolio positions that can \u2018help facilitate robustness\u2019 include:<\/p>\n Defensive equities, including healthcare and utilities, \u00a0<\/p>\n Current Valuations Slightly Favour Cyclical Assets, Defensives Aren\u2019t Far Behind (Discount to Fair Value):<\/strong><\/p>\n Via Morningstar<\/p>\n But hang on, here are three \u2018swing factors\u2019 that could upend Morningstar\u2019s base case:<\/strong><\/em><\/p>\n 1. Geopolitics<\/strong><\/p>\n Matt says with the return of military conflict in eastern Europe and the Middle East, geopolitics has become \u2018a greater swing factor\u2019 than in recent years.<\/p>\n \u201cWe\u2019ve also seen more abrasive relations between China and the U.S. and scope for elections to result in large policy shifts.<\/p>\n \u201cAs investors anticipate change and adapt to new risks, these conflicts have already impacted prices, with potential knock-on effects on commodity prices including critical energy supplies. We must also weigh the economic effects of an ongoing rise in military spending in Europe, Asia and the US.\u201d<\/p>\n 2. Climate<\/strong><\/p>\n \u201cNatural events impacting our physical environment and health have the potential to impact growth and inflation depending on severity and government responses.<\/p>\n \u201cExtremes in weather impacted energy demand in 2021 with shortfalls in solar and wind in North Asia causing higher demand and prices for gas while pandemics had tragic impacts and ongoing constraints on supply that especially impacted the economy in China from 2020 to 2022.\u201d<\/p>\n 3. Technology<\/strong><\/p>\n Morningstar\u2019s third swing factor is the take up of technological innovation.<\/p>\n \u201cOnly when the breakthrough discoveries of the past like the printing press, steam engines, electricity and computing were applied at scale did they enhance productivity, increase growth and ease inflationary pressures.<\/p>\n \u201cThe faster artificial intelligence is applied, the faster the effects will be felt and we are at the point now where application is expected to ramp up,\u201d according to Matt.<\/p>\n According to Matt, taken together, in periods of change like today, investors need to prepare themselves for a wider-than-usual range of potential economic scenarios.<\/p>\n \u201cThis means looking at a well-diversified portfolio that goes beyond a focus on equities.\u201d<\/p>\n To ensure a robust portfolio, Matt likes defensive equities, including healthcare and utilities; inflation-linked bonds; and diversified currency exposure outside the US dollar. The report highlighted opportunities in artificial intelligence, but investors need to be wary of frothy valuations.<\/p>\n \u201cArtificial intelligence is an exciting theme, and we expect a lot of market interest in 2024,\u201d Matt said.<\/p>\n \u201cHowever, while some of these companies are great businesses, valuations at the moment appear lofty. Based on its current valuations a business like Nvidia will need to buy another Nvidia if it is fulfill its current share price.<\/p>\n \u201cThe risk\/reward equation is not in favour of the investor despite it being a fantastic company.\u201d<\/p>\n Morningstar notes that 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.<\/p>\n These \u2018second derivative plays\u2019 are business such as IT consulting companies, data management providers and data centres.<\/p>\n \u201cWe see opportunities in businesses like Taiwan Semiconductor or Samsung that could support stocks like Nvidia,\u201d Matt Wacher says.<\/p>\n \u201cEven bigger IT consultants like IBM or Fujitsu are well placed for the future.\u201d<\/p>\n \u00a0<\/p>\n <\/span><\/p>\n The post Year of the Carrot and Stick: 2024 brings more risk and more optimism, says Morningstar<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"
\n\u00a0<\/p>\nMorningstar\u2019s Macroeconomic Outlook for 2024<\/h2>\n
Known Unknowns<\/h2>\n
\n Inflation-linked bonds,
\n Diversified currency exposure outside the US dollar.<\/p>\nSo, cover ALL your bases<\/h2>\n
\n\u00a0<\/p>\nAI\/Tech stocks: Just mind the valuations<\/h2>\n
Carrots and Stocks:<\/h2>\n\n