Fidelity 2024 Outlook

Notes

• Our base case for 2024 is a cyclical recession
• US excess consumer savings almost depleted
• Current business activity indicators show Europe slowing down faster than the US
• In a recession, India and Indonesia are markets with good defensive qualities that are less tied to the global cycle
• A cyclical recession demands a focus on companies where we can have a direct influence over the structure and documentation of deals in private credit
• If the yield curves remain inverted in all major currencies, we would suggest money market funds as a respectable alternative for more cautious investors, as they offer higher yields than government bonds with almost no risk.
• Current consensus earnings forecasts look too optimistic for this scenario so we would expect them to be downgraded. It would be worth looking for cheap stocks in markets such as Europe and Japan where valuations are far from pricing in any kind of recession. Japan is especially positive for equity owners thanks to a series of corporate governance reforms which have focused on shareholder returns. We would also expect the yen to strengthen if there were interest rate cuts elsewhere.
• In a cyclical recession we would be cautious around European cyclicals like industrials but would expect to find opportunities among financials, which are attractively valued. Bond proxies like utilities, consumer staples, and healthcare also typically do well in a cyclical recession.
• There could be an interesting dynamic around small and mid-cap stocks in this scenario. These companies were derated in 2023 as they grappled with higher interest rates, and so have already cheapened in relation to forward earnings estimates (although some nervousness about their ability to meet those estimates remains). If there is further economic pressure in the early part of the year, then small-caps could come under pressure, but when we do see some relief on interest rates, smaller stocks may have more recovery potential.
• China’s economic slowdown and the resilience of the US dollar have dimmed the lustre of many Asian economies’ strong growth momentum in the past year