How U.S. Investors Should Navigate the Global Growth Slowdown

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As the world approaches the midway point of a transformative decade, the World Bank’s Global Economic Prospects report reveals the slowest half-decade of GDP growth in 30 years by the end of 2024.

Despite a reduced risk of global recession, geopolitical tensions pose near-term threats, and the medium-term outlook dims for many developing economies due to slowed growth, sluggish global trade and tight financial conditions.

Global trade growth in 2024 is anticipated to be half the pre-pandemic decade average while borrowing costs for developing economies, particularly those with poor credit ratings, are expected to stay high amid four-decade highs in global interest rates, adjusted for inflation.

Stronger U.S. Spending

The 2023 global growth exceeded predictions by 0.4%, propelled by a robust U.S. economy, growing 2.7%. However, 2024 growth is expected to slow to 2.4% due to high-interest rates, world conflicts, slow international trade and climate disasters.

The eurozone faces a bleaker outlook, with 2024 growth forecast at 0.8%, following a meager 0.6% growth in 2023, influenced by high energy prices. Tightened credit conditions led to a 0.6 percentage point reduction in the region’s 2024 forecast compared to the June projection.

Banks Predict Global Economic Growth Slowdown

Leading banks forecast a 2024 global economic slowdown due to high interest rates, rising energy costs and economic deceleration in major economies. Geopolitical risks, especially in Ukraine and the Middle East, add uncertainties. A Reuters poll suggested a drop from 2.9% to 2.6% global growth.

While a recession is likely avoided, concerns linger about “mild recessions” in Europe and the United Kingdom. According to the World Economic Forum’s Chief Economists Outlook, 56% of respondents expect the economy to weaken in 2024.

Morgan Stanley’s (NYSE:MS) James Lord noted a U.S. growth slowdown but potential first-half outperformance in 2024. In contrast, Goldman Sachs Research offers optimism, citing strong global economic performance in 2023 and stable GDP growth amid severe inflationary pressures in major economies.

Uncertainty over Federal Reserve actions and a shift in manufacturing locations impacting China’s growth add complexity to the global economic outlook. While some foresee a soft landing for the U.S., differing views persist on growth expectations in 2024.

World Bank Forecast

The World Bank cautioned on January 9 that global growth in 2024 would decelerate for the third consecutive year, exacerbating poverty and escalating debt in numerous developing nations. Hindered by the COVID-19 pandemic, followed by the Russia/Ukraine war and subsequent inflation and interest rate surges worldwide, the first half of the 2020s is now poised to be the most challenging half-decade in three decades.

The World Bank’s latest Global Economic Prospects report projects a 2.4% global GDP growth for this year, down from 2.6% in 2023, 3.0% in 2022 and 6.2% in 2021. That marks weaker growth in the 2020 to 2024 period compared to previous instances like the 2008 to 2009 financial crisis and the late 1990s Asian financial crisis.

Excluding the 2020 pandemic contraction, this year’s growth is anticipated to be the weakest since the 2009 global financial crisis.

The World Bank adjusted its 2025 global growth forecast from 3.0% to 2.7%, citing expected slowdowns in advanced economies. The aim of ending extreme poverty by 2030 appears challenging, as geopolitical conflicts hinder economic progress.

World Bank Group Chief Economist Indermit Gill expressed concern about a decade of missed opportunities, with weak near-term growth, high debt levels and limited food access for a significant portion of the population in many developing countries.

How Investors Have Been Reacting

Major investors are revising their 2024 strategies, abandoning traditional approaches tied to predicting a recession and interest rate cuts. They are shifting focus from government bonds and major tech stocks, opting to seek undervalued stocks in sectors historically affected by recession fears, which have not materialized.

The previously robust bond rally, starting in October 2023, has slowed due to robust data, including recent strong U.S. jobs figures, challenging expectations of swift monetary policy easing.

Amidst the risk of stock markets reacting to a decline in rate cut expectations, certain fund managers anticipate consistent economic growth will support small-cap shares, banks and cyclical stocks. Evan Brown from UBS Asset Management suggested favoring mid-sized U.S. stocks beyond major tech and European banks, expressing a preference for stocks over bonds.

Contrary to the long-held belief that elevated borrowing costs would lead to economic struggles and increased unemployment, recent developments indicate a less dire outlook.

Ken Mahoney, President of Mahoney Asset Management, suggests following the money trail into the stock market instead of staying on the sidelines worrying about a nonexistent recession. Pictet Wealth Management CIO Cesar Perez Ruiz sees low-valued global businesses as potential takeover targets, expressing interest in exploring bargains in the U.K.’s mid-cap FTSE 250 index.

Money markets anticipate around 140 basis points of U.S. rate cuts for the year, a slight decrease from December’s projection of 150 bps, leading to a stronger dollar. Federated Hermes Chief Equity Strategist Philip Orlando expects a soft economic landing, with the Fed being more conservative in rate cuts than the consensus suggests.

Bottom Line

Despite varied outlooks from leading financial institutions and concerns over geopolitical risks, investors are reshaping strategies by moving away from traditional recession-predicting approaches and focusing on undervalued stocks in sectors historically impacted by economic downturns. Pragmatic adaptation, proactive investment choices and a shift towards sectors demonstrating resilience amid uncertainty may offer avenues for navigating the complexities of the current economic environment.

While the World Bank’s cautionary forecast and concerns over missed opportunities create a backdrop of economic challenges, U.S. investors are not merely on the defensive. Shifting away from bonds and major tech stocks, they are exploring opportunities in small-cap shares, banks and cyclical stocks. The reassessment of rate cut expectations and the slight decrease in anticipated U.S. rate cuts suggest a nuanced approach, with some anticipating a soft economic landing.

In this environment, staying vigilant, exploring undervalued sectors and maintaining a proactive stance may be key to not only weathering the slowdown but also positioning for potential opportunities as the global economic landscape continues to evolve.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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