This year has been a year characterised by uncertainty and volatility for investors. Heading into 2023, high energy prices, inflation, and rising interest rates were widely expected to drive the US, the world’s largest economy, into a recession, and the UK and Europe would follow.
However, despite everything that’s been thrown at it, the US economy has continued to grow at a rapid clip. Although recent data suggests the economic activity in Europe and the UK is starting to slow (and there are also emerging signs the same is happening in the US), economic activity and asset prices have held up far better than many analysts were predicting in 2023. That’s despite surging interest rates.
Still, 2024 will present a new set of risks for investors. Some of these risks will come as a surprise - others we already know of and can prepare for, like the US presidential election.
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The US election is almost certain to impact the global outlook next year, considering the vast and growing gap between the goals of the Republican party and the Democrats.
Another challenge the global economy will likely face in 2024 is the continuing deterioration of China’s property market.
The housing market makes up 12% of Chinese GDP and accounts for a third of the country’s investment, meaning it has substantial multiplier impacts on the broader economy. But despite policymakers throwing money at the sector, new property sales could fall by a fifth in 2023. China’s consumers have trillions of dollars of wealth tied up in property, and the downturn will damage consumer sentiment, spending and demand in the economy.
Back in Europe, rating agency Fitch believes Germany’s economy will contract by 0.4% in 2023, as ECB policy tightening is weighing on credit growth. Germany is Europe’s engine room, and a downturn will have knock-on effects on the rest of the eurozone.
These are some of the main identifiable risks investors face in 2024.
The Economist’s Intelligence Unit identifies the risk of extreme weather events, which are becoming more common. If they start happening in a “more synchronised manner”, it could considerably impact global supply chains and economic activity.
The Economist also highlights the risk of a broader conflict in the Middle East in 2024 following the military conflict between Israel and Hamas, which has set back efforts at “Israeli-Arab rapprochement.” China/Taiwan is another area to watch. Although the chances of a full-scale war are low, regional tensions are forcing companies to re-think their regional exposures.
Prepare your portfolio
Considering all the risks outlined above, how should investors prepare their portfolios for 2024?
Uncertainty will likely remain the name of the game next year, but investors now have the option of holding money in cash and earning a half-decent return for the first time since the financial crisis. That means cash and cash-like assets, such as short-dated government bonds and money market funds, may have a place in a portfolio going into 2024 to hedge against risk and uncertainty.
It’s also worth taking a look at gold. Investors consider gold a safe haven in times of inflation and uncertainty. The yellow metal isn’t the most exciting asset in the world, but it can add some stability to a portfolio in times of uncertainty. As such, it could be worth adding some gold as an insurance policy against global economic instability.
For investors in the UK in particular, considering the darkening outlook for the domestic economy and Europe - the UK’s largest trading partner - it might make sense to move some capital into international equities. While it would be a mistake to think buying US or emerging market equities would protect a portfolio from some of the more significant risks outlined above, it would help reduce risk by improving exposure to different countries, markets and sectors.
Adding exposure to key commodities may help diversify a portfolio further.
Several major themes are set to drive the demand for crucial commodities higher in the long term, no matter what happens next year.
The global green technology and sustainability market is forecast to grow rapidly over the next decade, driving demand for commodities such as copper and lithium, used in batteries for electric vehicles. The booming market will also help companies like NextEra Energy (one of the largest renewable energy companies in the world) and First Solar (a leading manufacturer of photovoltaic solar panels and solar energy technologies).
According to the Global Infrastructure Hub, a G20 initiative, the need for infrastructure investment is forecast to reach $94 trillion by 2040.
That will drive demand for iron ore, a key component of steel and other construction materials, and generate profits for the construction and infrastructure sectors. These could be other assets worth adding to a portfolio in 2024 to navigate near-term risks while focusing on long-term growth.
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