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August 2, 2024
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Investment outlook for partners and professionals
August 2, 2024
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SUMMARY
With the global economy growing and normalizing, we believe this is a potential opportunity for the professionals and partners we serve. We set out investment strategies to consider for the rest of 2024 and beyond.
Key takeaways
The global economy is set to continue growing at least through 2025
We believe this calls for constructively positioned and fully invested portfolios
With a decent outlook for returns across many asset classes, now is an especially unfavorable time to sit in cash
What next for the global economy and markets?
According to Wealth Outlook 2024 Mid-Year Edition – prepared by Citi Wealth’s Chief Investment Officer and his team – world GDP may increase 2.6% this year and 2.9% in 2025. And with inflation continuing to ease, the US Federal Reserve may follow central banks in other developed economies in cutting interest rates in 2024.
We see this period as one of normalization after the succession of stresses and shocks since 2020. This phase of the economic cycle could last at least through 2025, in our view.
Against this backdrop, we expect a broadening of corporate earnings gains across industries. Those that suffered last year – such as healthcare – look poised for recovery.
For you, the dynamic partners and professionals whom we serve, we believe this to be a time of potential opportunity for your wealth.
Many of you and your firms may experience the benefits of growth and normalization directly. For example, global mergers and acquisitions (M&A) volumes were $1.6 trillion, up 32% year-over-year.1 Initial public offerings (IPOs) have also shown signs of revival – figure 1.
Figure 1. IPO rebound in the Americas and Europe
1 Wealth Outlook 2024 Mid-Year Edition, as of 31 May 2024. Chart shows year-over-year change in IPOs and proceeds in the first quarter of 2024.
What might growth and normalization mean for portfolios?
Amid growth and normalization, there may be upside potential for several asset classes over coming years.
Valuations are consistent with decent annualized returns over the next decade not only for equities and fixed income, but for suitable and qualified clients, also for the alternative asset classes of private equity, real estate, and hedge funds – figure 2.
Of course, these asset classes come with many risks, such as illiquidity, investment risks including a complete of capital, and operational risks, which arise from managers’ processes, policies and people.
Focusing on the coming year or so, we expect equities can continue their recent rally, with participation broadening further beyond big tech names.
We also identify ways for seeking portfolio income ahead of the falls in US interest rates that we see coming.
Of course, there are also risks ahead. These include potential inflationary shocks, escalating tariffs, supply chain dislocations, and geopolitical flareups. But such scenarios are not our base case – and we look for constructive ways to prepare for them.
2024 mid-year SRE (Strategic Return Estimate) |
|
|---|---|
Global Equities* |
6.4% |
Developed Market Equities |
6.0% |
Emerging Market Equities |
10.4% |
Global Fixed Income |
5.3% |
Investment Grade Fixed Income |
5.1% |
High Yield Fixed Income |
6.3% |
Emerging Market Fixed Income |
7.1% |
Cash* |
3.2% |
Hedge Funds* |
8.5% |
Private Equity |
14.6% |
Real Estate |
10.8% |
Commodities |
2.6% |
Source: CGW Global Asset Allocation and Quantitative Research Team. Strategic Return Estimates (SREs) for Mid-Year 2024 (based on data as of April 2024), prior Strategic Return Estimates for 2024 (based on data as of October 2023) and 2023 SREs (based on data as of October 2022). The Strategic Return Estimates are calculated annually and can be reassessed periodically. * The Mid-Year 2024 Strategic Return Estimates for small- and mid-cap equities, private equity and hedge funds were adjusted with a source data change (S&P 400 replaced MSCI US Small Cap). The broadest measure of SMID valuations (MSCI US Small Cap) includes loss-making companies which tend to inflate the valuation of the asset class. By switching to S&P 400 index that includes relatively higher quality companies than MSCI US Small Cap, our estimates become more conservative. We believe this better reflects the future valuation. This approach, coupled with market performance between October 2023 through April 2024, has lowered some of our SREs. Related to the SREs on cash, we switched from the current real cash yield to the moving average of the real cash yield. Returns estimated in US Dollars. All estimates are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. Strategic Return Estimates are no guarantee of future performance. Past performance is no guarantee of future returns. Strategic Return Estimates based on indices are Citi Global Wealth’s forecast of returns for specific asset classes (to which the index belongs) over a 10-year time horizon. Indices are used to proxy for each asset class. The forecast for each specific asset class is made using a proprietary methodology that is appropriate for that asset class. Equity asset classes utilize a proprietary forecasting methodology based on the assumption that equity valuations revert to their long-term trend over time. The methodology is built around specific valuation measures that require several stages of calculation. Assumptions on the projected growth of earnings and dividends are additionally applied to calculate the SRE of the equity asset class. Fixed Income asset class forecasts use a proprietary forecasting methodology that is based on current yield levels. Other asset classes utilize other specific forecasting methodologies. SREs do not reflect the deduction of client fees and expenses. Past performance is not indicative of future results. Future rates of return cannot be predicted with certainty. Investments that pay higher rates of return are often subject to higher risk and greater potential loss in an extreme scenario. The actual rate of return on investments can vary widely. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index. All SRE information shown above is hypothetical, not the actual performance of any client account. Hypothetical information reflects the application of a model methodology and selection of securities in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading.
But with plenty of pent-up demand for deals among companies, we believe such trends can continue, boosting the need for specialist professional services. This in turn points to higher revenues for elite firms and increased compensation for their professionals.
Positioning portfolios for growth
Depending on individual investor objectives, we believe today’s conditions call for positively positioned core investment portfolios.
This means getting portfolios fully invested in a carefully chosen mix of global asset classes that reflect individual risk tolerance and objectives– and keeping them that way.
Within portfolios, it also means seeking exposure to powerful forces that we believe can transform the world around us.
Key forces transforming the world and portfolios:
Artificial intelligence: Investments in key elements of this game-changing technology
Energy transition: Both renewable and traditional energy companies
Strategic rivalry between the US and China: Country and sector beneficiaries of escalating competition, especially in Asia
Economic and national security – Energy, defense, cybersecurity and tech investments that may benefit as companies seek to bolster their security in an uncertain world
Preparing portfolios for geopolitical shocks and other challenges
With geopolitical tension seemingly constant and a noisy US presidential election getting closer, there may be a temptation to shift into or remain in cash and wait for a “better” time to buy. Long experience, however, suggests taking a more constructive approach.
The Wealth Outlook Mid-Year Edition shows that the impact of geopolitical events going back to 1941 have been short-lived. Around 90% of them have not changed the direction of the global economy and markets.
Instead, global diversification has helped investors weather many such storms. Some asset classes have held up well during difficult times, while being fully invested has enabled investors to benefit from compound returns over time.
Nonetheless, global investing also brings risks of its own. Emerging markets, for example, generally come with greater economic and political risks than investing in, say, the US and other developed markets. Exposure to overseas markets also entails currency risks, such that an investor could simultaneously see their investment holding fall in price while also seeing its value in their home currency fall, leading to an even greater overall loss.
The value of financial wellness
Given the unrelenting demands of your career, we know it can be hard to find time to focus on your core portfolio, which is a key part of your financial wellness.
At Citi Global Wealth at Work, we can help you take stock of your allocation and determine whether you are positioned for the risks and potential opportunities that we see ahead.
