T. Rowe Price forecasts 2024 market adjustments with limited rate cuts

T. Rowe Price predicts fewer rate cuts and sees new opportunities in equities and bonds for 2024

T. Rowe Price forecasts 2024 market adjustments with limited rate cuts

T. Rowe Price, a global investment management firm, has released its outlook for the global financial markets for the remainder of 2024.

The outlook highlights changes in expectations for central bank policies. Interest rate futures indicate fewer interest rate cuts from global central banks than expected at the start of the year. Equity and fixed income markets are adjusting to these new expectations, noting key trends for the rest of the year:

  • Broadening global growth due to decreasing recession risk.
  • Increased potential for surprises from the Federal Reserve (Fed).
  • Risk of reaccelerating inflation, partly driven by persistent services inflation.
  • More opportunities in equities, especially in value and small-cap stocks.
  • Reduced liquidity preference in favour of equities and short-duration bonds.

The current market environment, with higher rates and asset price dispersion, creates favourable conditions for active management to outperform passive strategies.

Nikolaj Schmidt, chief international economist, observed a significant shift in the global economic outlook over the past six months.

In late 2023, falling inflation led to expectations of substantial rate cuts. Now, the outlook anticipates broadening global growth, resilient inflation pressures, and limited easing from central banks.

In the US, Schmidt expects the Fed to cut interest rates by 25 basis points (0.25 percent) at its December policy meeting, following the November elections. Another possible rate cut could occur in late summer. The outlook for Fed easing in 2025 is uncertain, with one or two rate reductions seeming realistic.

Ken Orchard, head of International Fixed Income, emphasized the persistent challenge of predicting inflation. Last year saw a decrease in global inflation due to goods disinflation, but now services inflation is driving renewed upward pressure.

This inflation, described as sticky, needs to decrease, requiring adjustments in wage pressures, fiscal spending, and energy prices. In this environment, Orchard recommends investors consider short duration credit such as loans and asset-backed securities (ABS), Asian government bonds, and inflation-protected bonds.

Peter Bates, equity portfolio manager, International Equities, highlighted increased opportunities in US equities for companies and sectors that have lagged.

As of late May, the performance within the ‘Magnificent Seven’ has begun to diverge, a trend expected to continue with the growing role of artificial intelligence (AI). The benefits of AI are unlikely to be evenly distributed among companies.

Additionally, Bates notes that value stocks are trading at a significant discount to growth stocks. If the Fed makes few or no cuts, market conditions will favour stocks that benefit from higher rates and inflation.

Tim Murray, chief capital markets strategist, Multi‚ÄĎAsset Division, pointed out that as recession fears diminish, the current preference for liquidity is likely to ease.

The focus has shifted from recession risk to inflation risk, prompting investors to move out of cash and into equities and short-duration bonds.

In this scenario, energy stocks may provide the best hedge against inflation. Shorter-term bonds offer attractive yields and the potential for price appreciation if yields decline.