SINGAPORE – After ending 2023 with a bang, financial markets have started 2024 in a much more subdued mood. The S&P 500 fell on the first three trading days of the year, the first time since 2015 that the index has kicked off the year with back-to-back falls. Meanwhile, the 10-year US yield rose, and gold was down.

Investors seem to be dialling back their extended expectations of how early central banks will cut rates in 2024, following the release of the US Federal Reserve’s more measured December minutes.

Still, the power of the Fed’s recent dovish pivot should not be underestimated. In effect, the recent easing of financial conditions has reduced the chances of a US recession and raised the odds of a “Goldilocks” environment. So, as many investors begin the new year looking for additional returns to toast, we see reasons to be hopeful as the year unfolds.

The upside case: Party like it’s the Roaring Twenties

In keeping with the spirit of the new year, we begin with an upside scenario that could allow equities to deliver low-teen gains from here until the year end.

For it to materialise, the first wish on the list is for the “immaculate disinflation” that drove markets in 2023 to endure – that is, for global inflation to continue to fall with minimal economic pain. With the US consumer price index now running at near 3 per cent and the labour market still resilient, the data has done its part to support this narrative so far.

That opens the door to a Fed “put” – or pre-emptive rate cuts even as the job market stays tight because inflation has fallen sufficiently, and the economy no longer needs the restrictive policy.

This scenario also envisions the United States entering a new macro regime similar to that of the Roaring Twenties: One where gross domestic product growth averages 2.5 per cent or higher over the next decade, with inflation staying at around 2 per cent to 3 per cent. The Fed funds rate could then settle at 3 per cent to 4 per cent, with the 10-year Treasury yield at around 4 per cent.

A greater and earlier productivity bump from the widespread adoption of artificial intelligence (AI) could help create this future, one in which a higher-growth environment bolsters corporate earnings, investor sentiment and, ultimately, equity prices.

Our base case: Counting down to a soft landing

While the upside case is plausible, it’s too early to sound the all-clear on the global economy. Our base case is for a soft landing where economic growth slows to just below trend, a US recession is avoided, inflation approaches central bank targets in the second half of 2024, and the Fed cuts interest rates by 100 basis points.

US growth decelerated from 4.9 per cent in the third quarter to around 2.5 per cent in the fourth, according to the Atlanta Fed’s nowcast. We expect the lagged impact of nearly two years of tight monetary policy to finally sting. But strong household and corporate balance sheets imply that a recession is unlikely.

However, in the near term, a backup in the 10-year US yield to above 4 per cent cannot be ruled out after recent sharp rallies. Investors should therefore be prepared for volatility. But continued disinflation should allow equities, bonds and alternatives to deliver positive returns in 2024 – as gradual policy easing supports valuations across most asset classes, and companies grow their earnings in the absence of a severe recession.

In China, sustained policy support should keep full-year growth in the mid-4 per cent range. Deposit rates at major state-owned banks are now down to the lowest since 1996. But amid a policy-induced economic transition, a fuller stabilisation for the housing downturn remains crucial to restoring public confidence.

Meanwhile, broader Asia should benefit from a cyclical upturn in traditional tech exports. Fading dollar strength should also remove a key headwind and could prompt inflows into Asian equities. If these materialise, emerging market equities could continue to re-rate in 2024.

New Year’s portfolio resolutions

With 2024 now under way, investors should adopt several good investing habits for their portfolios in the new year.

The most important move is to get in balance. After all, given our constructive outlook for 2024, time in the market with a balanced portfolio is better than trying to time the market.

Second, quality remains a core theme. Quality bonds still offer decent yields and the potential for capital appreciation as growth slows, while falling bond yields should provide a supportive backdrop for sectors like US tech as earnings recover alongside improving end-market demand in traditional tech segments (personal computers and smartphones).

Investors can also complement their core quality equity holdings with tactical exposure to US small caps as the Fed’s policy pivot nears. With around 50 per cent of small-cap floating rate debt (versus 10 per cent for large caps), the segment is highly sensitive to interest rates, and so should be a particular beneficiary of faster Fed rate cuts.

Third, manage liquidity. While rising central bank policy rates have increased the appeal of cash deposits for many investors, such high rates are unlikely to prevail through the year. Also, falling interest rates do not just reduce the return of cash, they increase reinvestment risk: If bonds and equities rally sharply, investors could be left on the sidelines.

Finally, capture growth with private markets. Significant private investment is needed to fund innovation in areas like AI and the green transition, but gaining exposure to fast-growing and innovative businesses through listed equities and public debt is becoming harder owing to shrinking supply. For risk-tolerant investors, private markets and alternatives offer attractive return potential in exchange for less liquidity.

Whatever your current and future goals are, we think these New Year’s resolutions can help you build a healthy portfolio for 2024 and beyond.

• The writer is the Asia-Pacific head of UBS Global Wealth Management’s Chief Investment Office.