State Street Global Advisors, the asset management business of State Street Corporation (NYSE: STT), today launched its 2024 Global Market Outlook: Positioning the Pieces outlining a mixed outlook and key investment themes for the year ahead.

Following a year of market-moving surprises in 2023, including persistent inflation, muted growth, an abrupt banking crisis, and continued monetary policy tightening, State Street Global Advisors anticipates this uncertainty will remain in 2024, with sub-trend growth projected across the globe.

Although the path to a soft landing remains the firm’s base case, investors should remain cautious amid the headwinds global economies face as monetary policy tightening continues to work its way through the system.

Lori Heinel, Global Chief Investment Officer, commented, “With escalating geopolitical tensions, major elections, and monetary policy reaching a critical juncture, the year ahead will be challenging for investors. 2024 will require agility to respond to market signals and multiple factors within the macroeconomic environment. While pockets of opportunity can be found in equities, we consider that fixed income offers better opportunity given current rates and our expected path of growth and future rates.”

US navigates a “soft” but fragile landing

“Over the past year, global economies have exhibited surprising resilience in the face of the sharpest tightening cycle experienced in decades, with the US economy showing impressive strength. While many regions could be set to benefit from a soft landing, it will depend heavily on central banks’ policies,” said Michael Arone, Chief Investment Strategist for the US SPDR Business.

The firm’s base case is that central banks will move more quickly to lower policy rates than markets are anticipating, particularly in the US. However, the firm expects any soft landing to be fragile and subject to the strategy of central banks, particularly the Federal Reserve. If central banks continue with their hawkish position, this soft landing could be jeopardized.

Escalating geopolitical conflicts also present a key risk. Going into 2024, the shifting geopolitical landscape – from uncertainty around international and trade relations, conflicts, and the ability of upcoming elections to reshape political rhetoric – all warrant close monitoring and agility in portfolio positioning.

Simona Mocuta, Chief Economist, added, “A world of sub-trend growth and ongoing disinflation will continue to pose challenges for investors since a soft landing is likely, but is not guaranteed.”

Bonds take center stage

With a potential significant slowdown in economic activity, and continued disinflation, State Street Global Advisors believes fixed income is one of the best-positioned asset classes from a risk/reward standpoint. In particular, it considers that sovereign fixed income – US Treasuries specifically – may be an attractive proposition over the medium term.

“With rate hikes still filtering through the global economy, we believe an overweight duration position in sovereign debt, namely US Treasuries, will enable investors to price in lower rates and a bullish steepening next year,” said Matt Nest, Global Head of Active Fixed Income.

Within fixed income, State Street Global Advisors expects a slowing economy and advancing credit cycle to present challenges to corporate income and balance sheets. Moreover, it expects there will be more rewarding entry levels for credit investors in the coming quarters.

Be selective with equities

State Street Global Advisors expects the outlook for equities in 2024 to be challenging. While the asset class performed better than expected in 2023, its recent strength, together with rising bond yields, have led to a reduced equity risk premium, which the firm believes makes equites a less attractive prospect.

Altaf Kassam, EMEA Head of Investment Strategy & Research, commented, “A more cautious and price-conscious consumer has negative implications for corporate earnings, so investors need to be especially cognizant of the risks to the asset class from elevated real interest rates, a slowing money supply, and sluggish economic growth expected in 2024.”

For applicable portfolios managed by it, State Street Global Advisors will therefore be adopting a selective approach to the asset class, with a focus on large cap and quality stocks that display resilient balance sheets, strong market positions, and are well-positioned to capitalize on policy initiatives to boost growth.

The US market is currently preferred by the firm in this respect due to its sector composition and the competitive advantage of its companies, while it believes Japan may be a bright spot given improving corporate governance and capital efficiency, evident in increased share buyback activity which the firm believes can be supported by the high levels of cash on corporate balance sheets. The firm believes Europe will, however, face headwinds due to challenging economic conditions, as monetary tightening has impacted the economy more quickly than the US due to a less supportive fiscal backdrop.

Emerging markets: a nuanced approach matters

Given the global backdrop, State Street Global Advisors expects emerging markets to remain vulnerable – but with pockets of opportunity – notably, hard currency debt and select emerging market equities.

The evolving backdrop of heightened volatility and uncertainty make hard currency sovereign debt look relatively more attractive than local, as EM spreads still offer value and, in the absence of a US recession, have the potential to tighten further.

About State Street Global Advisors

For four decades, State Street Global Advisors has served the world’s governments, institutions and financial advisors. With a rigorous, risk-aware approach built on research, analysis and market-tested experience, we build from a breadth of index and active strategies to create cost-effective solutions. And, as pioneers in index, ETF, and ESG investing, we are always inventing new ways to invest. As a result, we have become the world’s fourth-largest asset manager* with US $3.69 trillion^† under our care.

* Pensions & Investments Research Center, as of 12/31/22.

^† This figure is presented as of September 30, 2023 and includes approximately $58.13 billion USD of assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated. Please note all AUM is unaudited.

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