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An introduction from Alex Leung,
Head of Research & Strategy,
Infrastructure
It gives us great pleasure to announce that going forward, we’ve teamed up with The Red Thread as a means of connecting thinking across our industry. We believe that by unearthing the key threads that run though market trends, our readers should be able to see opportunity and risk with greater clarity.
While the current market landscape is hardly ‘predictable’, it does seem to have fallen into a pattern of sorts lately. Macro indicators have been stabilizing – economic growth remains stable and has surprised to the upside in some regions, greatly reducing hard-landing risks. Though long-term rates have remained higher for longer despite recent rate cuts, the direction of travel is clear so risks have been priced in.
Private markets have faced headwinds from the denominator effect following weakness in public equities in 2022. But global equities are up 40% in the past two years, which should reduce any straggling adverse impacts. With the biggest election year in human history already behind us, it seems reasonable to say that the problems ahead are more known than unknown, as least compared to 12 months ago.
We expect politics to play an outsize role in 2024. The US presidential election, the ongoing Israel-Hamas and Russia-Ukraine wars, and the rivalry between the US and China could all affect markets globally. Investors should prepare for bouts of politically driven volatility and consider hedges.
A new normal is coming into view for China. Constraints on old growth drivers and a new focus on higher-quality growth will likely temper its GDP growth toward a 4–4.5% pace over the next decade. For investors, this means a greater long-term focus on sectors aligned with the country’s efforts to boost its tech self-sufficiency, localize mass consumption, upgrade its high tech and industrial sectors, and lead the global green transition.
Generative artificial intelligence isn’t a new concept—the broad idea has been around since the 1960s, and the transformer architecture that makes it more effective was detailed in 2017. But the launch of ChatGPT has shown its potential impact when combined with a platform with strong consumer adoption. Currently, we see AI-related opportunities across a range of software, internet, and semiconductor stocks.
We expect central banks to commence rate-cutting cycles in 2024. In our view, government bond markets are overpricing the risk that high interest rates will represent the new normal, and we expect yields to fall in 2024.
Debt is likely to continue to rise, fixed income volatility is likely to be higher in the decade ahead, and we think it unlikely that rates and yields will return to pandemic-era lows. But we do not believe that rates or yields are now in a structural uptrend. Debt, demographic, and productivity trends, along with a gradual restoration of central bank credibility, mean we expect rates and yields to settle at lower levels than today’s.
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Meet the members of the team responsible for UBS Asset Management’s strategic direction.
