When you’ve got some idea of where the economy might be headed, deciding which assets to put in your portfolio becomes a much easier lift. So it makes sense, then, that UBS lays out its economic forecast first, before revealing its favorite asset class, sectors, and currencies for 2024, along with its thoughts on what you should do with the cash you’ve got sitting in your account. Here’s what the big Swiss bank has to say about the year to come and your portfolio…
What’s the outlook for the year ahead?
Cutting right to the chase, this is all about two things: economic growth and interest rates.
Economic growth: UBS isn’t wringing its hands about the US. It sees the world’s biggest economy pulling off the “soft landing” (that is, bringing down its hot inflation with interest rate increases, while not crashing the whole darn economy into a recession). And that smooth ride is thanks mostly to the rip-roaring job market and the financial muscle of the country’s households and businesses. But UBS still expects growth to stammer, falling to 1.1% in 2024, compared to this year’s projected 2.4%. And that’s understandable as consumers tighten their belts to cope with higher interest rates, Medicaid cutbacks, and the end of pandemic-era childcare funding and student-loan relief.
UBS economic growth forecasts for the US, eurozone, and China, as measured by real gross domestic product (GDP). This gauge, which is adjusted for inflation, reflects the value of all the goods and services produced by the economy in a given year. Source: UBS.
UBS may be doing a little hand-wringing over Europe, where growth is expected to crawl along at a sluggish 0.6%, little better than the 0.5% that’s forecasted for 2023. The bank expects stronger consumer spending and supportive government policies to be mostly drowned out by the negatives – think: higher interest rates, stricter lending standards, sky-high energy costs, and softer demand for exports.
But China is where the real worries are. Lackluster spending, lukewarm external demand, and lingering property market troubles mean that growth is expected to weaken to 4.4% in 2024, from an estimated 5.2% in 2023. What’s more, the long-term picture for China suggests the days of 6%-plus annual growth might now be over, because of its shrinking workforce, stalling trade-driven growth, and shakier geopolitical scene. Mind you, it’s not all bad news for China, with lasting growth drivers like consumer spending, the green transition, and upgrading industrial supply chains all likely to stick around.
The main contributors to UBS’s projected 2024 global GDP growth slowdown, by region/country. Source: UBS.
Interest rates: Inflation’s been shimmying toward central banks’ targets this year, and UBS thinks the melody will keep going in 2024. They’re predicting that both the US and eurozone will see core consumer prices in the 2–2.5% range by the end of 2024, led by a drop in homeowner-related inflation, slowing consumer demand, and slower wage growth. Even though inflation is expected to stay above the 2% target for most (or maybe all) of the upcoming year, UBS believes that by the middle of the year, policymakers will be feeling confident that inflation is on a sustainable downward path. Their base case is for the European Central Bank (ECB) and Bank of England (BoE) each to cut rates by 0.75% in 2024, while the Fed and Swiss National Bank ease by 0.5% next year.
UBS forecasted cumulative rate cuts in 2024. Source: UBS.
What does this mean for your portfolio?
In its base-case (i.e. most likely) scenario, UBS predicts that the S&P 500 will hit 4,700 by end 2024 – and that’s just 3% upside from today’s level. Even in its most bullish scenario, UBS expects only a 12% gain, with the benchmark index hitting 5,100. And so it’s no wonder it likes bonds over other asset classes in the next year, and is recommending a focus on quality stocks, with oil and gold thrown in there to hedge your market risks.
In a nutshell, here’s how likely UBS sees various scenarios for next year – and how the bank sees them affecting the overall S&P 500 level and the US 10-year Treasury yield. The size of each bubble represents the forecasted probabilities. And the color of the bubble represents the “mood” of each forecast: bullish (green), base case (orange), and bearish (red). Sources: Finimize, UBS.
Let’s take a look at the recommendations by asset class.
Stocks: Slow growth does make investing challenging. So UBS is favoring quality stocks – meaning, the ones with a high return on invested capital, strong balance sheets, and reliable income streams. History shows that these stocks tend to outperform when the economy is in the “late cycle” where growth slows. If you’re looking for a treasure trove of quality shares, set your sights on US tech. These companies boast top-notch returns and seemingly unbreakable balance sheets. Plus, they’re riding the AI wave of the future, so they’ve got some of the juiciest earnings growth. UBS is also giving a nod to emerging market stocks, but they’re giving side-eye to UK shares because of their weak earnings. To invest, you could consider the iShares US Technology ETF (ticker: IYW; expense ratio: 0.4%), the Invesco S&P 500 Quality ETF (SPHQ; 0.15%), or the Xtrackers MSCI Emerging Markets UCITS ETF 1C (XMME; 0.18%).
Bonds: This is UBS’s top asset class for 2024. It sees the market betting on interest rates not dropping below 4.2% over the next five years – a scenario UBS finds pretty far-fetched indeed. The bank is eyeing quality bonds, especially government and investment grade ones, because they’ve got sweet yields and could see some capital appreciation if the market starts thinking rates will go lower in 2024. And, let’s face it, in a world full of uncertainty, government bonds become the go-to safe haven every now and then. UBS has a soft spot for bonds with a 1-year to 10-year duration, and gives a shout-out to the five-year mark for its triple threat of solid yields, stability, and a dash of sensitivity to the possibility of interest rates sliding.
Currencies: The Australian dollar and the Japanese yen are UBS’s top currency picks. Its analysts don’t see the Reserve Bank of Australia rushing to cut interest rates, anytime soon, which should keep the Aussie dollar strong, especially with solid fiscal and external positions backing it up. They like the yen because they see the Bank of Japan tightening the monetary screws, and that will help prevent further yen weakness.
As for the US dollar, euro, British pound, and Swiss franc – well, the analysts aren’t expecting fireworks. They say the greenback won’t see massive gains because everyone’s already factored in the country’s robust economic growth and high interest rates. And the euro, pound, and franc are likely to make only restrained moves, because of their economic growth struggles and cautious central banks.
It’s likely to be a fairly quiet year for the world’s major currencies, according to UBS’s 2024 forecasts, but the Australian dollar and Japanese yen could have a good year. Source: UBS.
Commodities: Broadly, commodities aren’t expected to fare too badly, with returns projected to be in the mid-to-low teens. Oil could have the best year of them all: UBS sees Brent crude gushing to the $90-$100 per barrel range, and if political conflicts escalate, there’s potential for even higher gains. And don’t forget about gold: it’s not just shiny, it’s a solid hedge against rising geopolitical tensions and stands to benefit from expected rate cuts in the US.
Cash: Cash won’t be king in 2024. Tempting as it might be to sit on stacks of it during times of war and geopolitical uncertainty, UBS predicts that interest rates will drop in 2024. And that means the returns on cash will take a hit, and reinvestment risks will climb. Their suggestion, then, is to optimize your returns by snapping up quality bonds or by locking in today’s higher yields with fixed-term deposits.
