For professional investors and qualified investors only

2024 MACRO OUTLOOKBalancing uncertainty
and optimism

William Davies
Global Chief
Investment Officer

The economic data in 2023 was better than
expected: inflation fell, employment remained
resilient and we didn’t end up in recession – in fact
growth was impressively resilient.
All of this “good news” forced the US Federal Reserve and other global
central banks to keep rates higher for longer. Now, we are seeing uncertainty
around the timing of rate cuts and of the scale and timing of an economic
slowdown, introducing some fear into the market. Here are my thoughts as
we head into 2024:

Geopolitical risks may outweigh economic risks
The slowdown we are all expecting keeps being put off, but I don’t expect it
to be overly severe when it finally occurs. The relative risks of incrementallyhigher or lower inflation, or a milder or deeper recession, are at least known
risks. We think the bigger dangers in 2024 will be geopolitical, which have

Issued November 2023

1

2024 Macro outlook

more potential to throw expectations off track. This includes
escalation in the Middle East and increasing tensions between
the US and China.
Outside of the tragic human toll of the former, these events
introduce volatility in the short term and inflationary pressuresin the long term. These pressures impact companies directly,
as finding alternative energy supplies or building new supply
chains will be costly. Another wildcard is the US elections. It is
hard to predict the effect, if any, it will have on the markets – and
it is that very unpredictability that is the problem. Markets hate
uncertainty.

I think you need to look beyond
the narrow grouping of companies
that led the market in 2023 ...
performance will widen from here

Opportunities amid uncertainty

Differentiation is returning to markets

As we head into the new year investing will involve balancing
one’s optimism for the global economy with the many
uncertainties we face. For bonds it means that one could
consider mid- to long-term US Treasuries and investment grade
corporate bonds, which are offering solid rates of return. You
could also consider high yield bonds where we are seeing nearly
double-digit yields that are tempting.

Through the Covid-19 pandemic and its immediate aftermath wesaw central banks and fiscal policy working towards the same
effect: stabilising economies. Their tactics may have differed but
the intent was largely consistent. Through 2023 we started to seesome differentiation in policy and economic outcome return, and we
think that may increase as we go through 2024 (Figure 1).

The choice is really tied to your view on the economic path fromhere and appetite for risk. In terms of stocks, I think you needto look beyond the narrow grouping of companies that led themarket in 2023. I think performance will widen from here, andareas that haven’t experienced the rallies we have seen in thestrongest sectors could be more attractive.

Issued November 2023

So the Fed may well keep rates higher for longer than the Bankof England, for example, as the UK economy, with its shorter-term
mortgage lending structure and greater overall vulnerability to higher
rates, weakens sooner. Europe successfully forestalled recession
in 2023 thanks in part to a mild winter, which allowed it to keepenergy costs down even with the loss of Russian supply. It ispossible we will see that again in 2024.

22024 Macro outlook

A longer timeline for the energy transition

Figure 1: a little less in sync?
2024 consensus expectations
Year-on-year
GDP growthYear-on-year
headline inflation

USJapanGermany
France
Italy
Spain
UK
China

In an environment of slowing economic growth, we may see theimplementation of energy transition programs slow down, or apullback on some commitments, as we have seen in the UK. That
is not to say that we won’t hit those commitments, but in a weakereconomic environment this effort is likely going to have to bebalanced with other economic and spending priorities.

Bottom line: there are opportunities ahead of a slowdown
The economy appears to be traveling on a path guided by low oreven slowing growth, falling inflation and high interest rates. There
are those who believe a deeper recession is possible becauseof lingering high interest rates, and those who expect inflation togo up because of continuing economic strengthening, an OPEC
production cut, or even the impacts of war. Investors should
prepare for that middle road between those outcomes, which I thinkis the most likely scenario over the next six months.

Source: Bloomberg/Columbia Threadneedle Investments, 25 October 2023

The point is, we are starting to see gaps open up, and we areseeing that in valuations, too. At 18x forward earnings, US stocks
are quite a bit more expensive than European stocks at 12x, andJapanese stocks at 14x. I don’t think valuation alone is the rightreason to make a regional bet right now, but it is another example
of growing differentiation across markets, which could lead toopportunities going forward.

Issued November 2023

In an environment of slowing
economic growth, we may see theimplementation of energy transition
programs slow down3

2024 Macro outlook

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