“Investors have been quite surprised with the resilience of the US economy holding up fairly well through the last few quarters, in spite of rapidly rising interest rates in the US and previously some stresses and pressure on commodity prices leading to high input prices.

“We’re starting to see some signs of cracks showing. But the gradual pace of economic activity decline means we’re looking at a mild recession in the US to evolve sometime in the middle of next year. And out in Europe and UK, one could reasonably argue these economies are already moving into recessionary conditions.

“In Australia similarly, we’re looking at inflation declining slower than expected and very much held up by still healthy demand for services. But growth is also moving along the same trajectory of seeing some slowdown, and housing markets stresses are starting to show up. Consumer spending is also softening out.

“What that all means in terms of policy rates is one should expect central banks around the world to keep policy on hold for a little while more, so higher for longer, and potentially for the Fed to start cutting rates around the middle of next year when a recession hard-landing sets in, and the second half of next year could see policy rates inching lower. That’s our central scenario and base case.

“At an asset class level, underweighting equities and being a bit more conservative on our equity holdings, will put us in good position to weather some of the upcoming potential pressure going into 2024. We have been slowly increasing our duration across most of our portfolios, although at a much more measured pace, in view of some of the technical developments and fiscal debt pressure that’s happening in the US bond and treasury markets.

“So, what we advocate in our portfolios and with investors is to increase the allocation to quality investments as well as to diversifying assets.

“In 2024 most developed market economies, including Australia, will start edging towards policy easing, as economic activity starts tapering off and declining. It’ll come through by way of a multi-speed scenarios. Europe and the UK will potentially lead the pack in rate cuts and rate easing to engineer a stimulus to support this recessionary hard-landing scenario, which should come through in the second quarter of next year.”

By Irene Goh, head of multi-asset investment solutions APAC & strategy

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