The world economy looks set to achieve a remarkable soft landing in 2024. This will continue to support global equity markets, but quality and focus will be key.
The MSCI World Equity index has risen by almost 8 per cent this year, delivering its best first-quarter return in five years.
Gains came both from rising corporate earnings, especially among artificial intelligence-linked technology names, and from higher valuations in Europe and Japan, as last year’s US-centric market has begun to broaden.
Investor sentiment has been buoyed by a global economy that should see inflation return to close to central bank targets by year-end, without triggering a recession.
Engineering a soft landing such as this is notoriously difficult, but a near picture-perfect one looks increasingly possible in 2024.
Yet, as markets reach new highs, investors could be forgiven for feeling queasy.
It was little more than a year ago that they faced near double-digit inflation and one of the most aggressive interest rate tightening cycles in recent history.
In addition, geopolitical challenges have emerged in quick succession, including Europe’s biggest land war since 1945, the risk of regional escalation in the Israel-Hamas conflict and, of course, an uncertain US election.
The key question for 2024 is not hard to frame: should investors embrace the soft-landing narrative and add to equity risk, or is this the moment to step back and raise cash, in the face of rising market complacency?
It looks like a global soft landing
The economic transformation achieved over the past 18 months is certainly impressive.
High inflation appears to have been quelled across the western world, with little penalty in terms of growth or employment.
True, US consumer prices ticked up modestly last month (from 3.1 per cent to 3.2 pre cent, driven by used cars and housing), but we expect a further fall to around 2.5 per cent by the end of 2024.
In the UK, the year-end figure could be even softer, at 2.1 per cent.
At the same time, US growth has remained robust (annualised GDP grew at 3.4 per cent in Q4 2023) while unemployment, at 3.8 per cent, is very close to the lows of the past 50 years.
Indeed, the International Monetary Fund now sees something close to a soft landing as the most probable outcome not just for the US but for 15 of the G20’s members.
It is worth remembering that soft landings are typically difficult to achieve.
The US has only truly succeeded in making two soft landings: in 1995 under former Federal Reserve chairman Alan Greenspan and before that in 1965, under the longest-serving chairman, William McChesney Martin.
A simultaneous global soft landing, as we are seeing today, is particularly rare.
Controlled disinflation
So, what lies behind the rapid decline in inflation rates worldwide?
First, the remarkable transformation of US domestic energy production has made America both the largest oil producer and gas exporter in the world.
