Will there be a soft landing in 2024?

“With economic growth slowing and interest rates relatively high, you want to be careful to choose companies with strong market share and strong balance sheets,” Burbeck said. Such firms will pick up market share as weaker competitors struggle and possibly disappear under the weight of debt repayments.

But, Burbeck added, you may also have to make quick buy or sell recommendations to clients as there may not be a lot of time between the ups and downs of equities.

Some experts interviewed by Investment Executive said a soft landing is likely in 2024, with low growth in the U.S. but mild recessions in Canada and Europe. Burbeck, however, said it’s too early to make a firm bet.

Matthieu Arseneau, deputy chief economist at National Bank Financial (NBF) in Montreal, and François Bourdon, managing partner with Nordis Capital Inc. in Montreal, are forecasting a mild downturn in all three regions.

Most agreed, though, that what happens is mainly in the hands of central banks.

Here’s a look at key factors and recommendations on asset allocation for 2024:

Monetary policy lag

The economies of Canada, the U.K. and Europe have already slowed and are close to or in recession. But the U.S. posted 5.2% annualized growth in the third quarter. Economists think this is only a delay, noting that Americans are spending their savings while Canadians and Europeans are putting more money away. Interest rate hikes generally take about five years to impact the economy because many current loans are locked in for certain terms.

Some think recession in the U.S. will be avoided in part because many Americans have 30-year mortgages, which insulate them from sudden rate increases. But higher rates hit non-mortgage consumer borrowing more quickly in the U.S., and business loans will also be affected. The need for corporate refinancings is behind Burbeck’s emphasis on strong balance sheets.

Another interest rate hike

Because of lag time, central banks can’t be sure when rates are high enough to slow the economy without producing a recession. Some members of the U.S. Federal Reserve Board are urging another hike while others want to cut soon, said Avery Shenfeld, chief economist with CIBC in Toronto.

Beata Caranci, chief economist with Toronto-Dominion Bank in Toronto, points out that the recent U.S. 30-year Treasuries auction was undersubscribed, showing that financial markets are nervous about the future path of interest rates.

Interest rate cuts

The same uncertainty applies to the decision to cut rates. Many economists expect the BoC to begin in the second quarter and for the Fed to wait until the third or fourth quarters — or even 2025, as Shenfeld suggested.

The Fed and BoC must also decide how much to cut and how quickly. Most experts think rates will keep falling during the first half of 2025, settling at 2%–3% in Canada and somewhat higher in the U.S.

Inflation

Sébastien Lavoie, chief economist with Laurentian Bank in Montreal, said the global economy isn’t synchronized, with China trying to stimulate and India outperforming other economies. Certain prices may continue to rise while others fall or remain stable.

Generally, economists expect inflation to be a little higher than in the 2012–2020 period due to several factors. Rejigging supply chains is one as companies move to a “just in case” from “just in time” business model, Burbeck noted. That means maintaining higher inventories of inputs as well as paying to bring production closer to home.

There’s also energy. The cost of decarbonization will push costs higher. Further, Saudi Arabia wants to keep the price of oil in the US$80–US$90 range as that’s what’s required to balance its budget, said Angelo Katsoras, geopolitical analyst with NBF. There’s also the risk of the Israel/Hamas war becoming regional with disruptions to oil freighters and production.

Investment strategies

Burbeck said U.S. equities aren’t cheap, but he still likes them. “You get what you pay for with American companies,” he said, noting that European companies aren’t as well managed. He warned, though, that small- to mid-sized companies could suffer.

He also likes emerging markets, which handled inflation “relatively well by raising interest rates earlier than North America and Europe.” He also believes the U.S. dollar could weaken, which would help developing countries that hold much of their government and corporate debt in the currency.

Arseneau recommended a defensive portfolio. Concerning equities, he suggested determining if a company has the ability to receive subsidies, which are becoming increasingly important as governments try to entice firms to locate in their jurisdiction. Unlike Burbeck, he doesn’t favour emerging markets because he suspects there will be a flight to the U.S. dollar as economies slow or turn down.

Shenfeld said with bond yields fairly healthy, there’s room for a larger allocation to fixed income, adding that balanced portfolios could have positive returns. “If things work out, equities could pick up in the second half of 2024,” he said. Others also expect a growth pickup at that time.

Bourdon suggested being long on cash, neutral on bonds and underweight equities. He expects “a 15%–20% equity correction when investors, who are currently expecting a soft landing, realize that the downturn will be more extensive.”

Lavoie also noted the risk in equities, and said there could be 10%–15% corrections next year, but followed by similar rallies. That said, he likes U.S. equities for their diversity and Canadian mining — specifically lithium and uranium — because of their importance to the energy transition.

Looking longer term, Caranci said financial markets will return to a more balanced state amid higher interest rates. As a recent TD report said, “Over the next decade, publicly traded firms should continue to invent/develop new products and benefit from having a global market for goods and services.”