Morgan Stanley's Global Market Outlook for 2024: Economic slowdown, monetary easing, and multiple challenges for the market.

After experiencing a challenging year in 2023, Morgan Stanley expects that 2024 will also be difficult, but with a different nature.

On Sunday, Morgan Stanley released its outlook for 2024. The bank's team, led by Chief Global Economist Seth Carpenter, predicts that restrictive monetary policies will continue to put pressure on the global economy next year, with a small number of countries possibly experiencing mild recession. Fixed income assets present opportunities, and the overall strategy remains defensive.

In terms of different markets, Morgan Stanley believes that the growth of developed markets will be below trend levels next year, while the growth prospects of emerging markets will be mixed.

They believe that although global inflation has peaked, returning to target levels will require a period of below-average growth. They expect global growth to slow down, with most developed economies able to avoid recession while curbing inflation.

Analysts acknowledge that there is a risk of recession everywhere, but they add that in some benchmark scenarios (such as the UK), any recession should be "mild":

"Inflation declines in the context of full employment, so real income remains unchanged, keeping consumption elastic. At the same time, investment spending becomes more unstable."

In addition, Morgan Stanley economists expect that after nearly two years of restrictive monetary policies, policy interest rates in most economies, except Japan, will remain largely unchanged in the first half of 2024 and gradually decrease as inflation cools towards target levels.

This means that by the end of 2024, policy interest rates in developed market countries should still be restrictive.

As for Japan, Morgan Stanley believes that the Bank of Japan will end its negative interest rate policy (NIRP) and yield curve control (YCC) policy in January 2024 and raise interest rates once in July 2024.

"No room for error"

Morgan Stanley believes that many markets in 2024 have already priced in the expectation of a smooth macroeconomic transition, namely an economic soft landing characterized by slowing growth and inflation, and eventually policy easing.

"Therefore, to prove that the valuations of many asset classes are reasonable, macro prospects need to 'perfectly achieve a landing'."

In this sense, there is almost no room for error.

Unlike the past two years, where there was a preference for emerging markets, economists expect that developed market assets will outperform emerging markets in 2024:

"In terms of currencies, we expect the strength of the US dollar to continue into the first quarter, as economic growth and interest rate differentials persist, and the defensive characteristics of the US dollar remain attractive. Against the backdrop of the Bank of Japan's exit from YCC and NIRP, the yen performs well."

The slowdown in the economy and loose policies lay the foundation for lower yields and steeper yield curves for the US, Europe, the UK, and the US dollar bloc. We believe this is a good start for "yield investing".

For investors seeking a yield of over 6%, economists believe that high-quality fixed income assets will have broad opportunities next year, including developed market government bonds, investment-grade credit, agency MBS, and the senior portion of securitized credit. Given that there is "almost no room for error," Morgan Stanley tends to "take a defensive stance," especially in the stock market:

Japan is our favorite region, while emerging markets are dragged down by Asian growth.

For the US stock market, we continue to recommend a defensive growth and late-cycle barbell portfolio, and we expect a sustained earnings recovery by 2024, although we anticipate a short-term earnings decline.

At the same time, we expect European stock market returns to bottom out in the first quarter, but any recovery could be L-shaped.