Slower but steady economic growth is UBS’ economic prediction for 2024. The company’s base-case scenario for 2024 anticipates a soft landing in which growth slows to just below trend, and equities and bonds deliver positive returns.
The predictions have been revealed in an update to the bank’s Year Ahead 2024 report, published on November 16th, 2023.
Surpassing expectations
UBS had originally predicted that 2024 would bring a slowdown of the US economy in which consumers would face “mounting headwinds”, European growth remained subdued and China entered a period of “lower, but potentially higher-quality” growth.”
However, the US and Chinese markets have demonstrated their resilience, reaching “surprisingly positive results” towards the end of 2023. In the period between mid-October and the end of December, the S&P 500 climbed 14% and the US Treasury yield was a full percentage point lower than its October highs.
The falling inflation data and the US Federal Reserve’s willingness to cut interest rates sooner, and by more than expected, have also contributed to fostering greater confidence in the US economy and the S&P 500, UBS said.
The new prediction
UBS’ new base-case scenario expects “further downside for bond yields” and “modest further upside for global equity indexes”, according to the new report.
The Swiss bank has said it now sees a 60% chance that the S&P 500 will reach 5,000 points at the end of the year – an increase from its previous prediction of 4,700. This would surpass the previous record of just under 4,800 the S&P 500 set in January 2022.
The US 10-year yield is expected to reach 3.5% and the euro $1.12.
“Our base case scenario is for a ‘soft landing,’ in which growth slows to just below trend, inflation falls toward central bank targets by the second half of the year, and US interest rates are cut four times in 2024”
UBS
When it comes to the US, the report’s data showed that the middle-income consumer
has spending power and a relatively strong balance sheet. This scenario, alongside the fact that labour markets do not appear to be cracking in a way that will drive higher precautionary savings, suggests that growth could “remain firmly positive”.
The report also highlights statements from Federal Open Market Committee Chair Jerome Powell, who said further interest hikes are “not likely,” and that the organisation is open to cutting interest rates even if the US does not enter a recession.
UBS expects interest rates to be cut by 100bps, starting in May, with four cuts being announced throughout the year. This would be due to an attempt to balance its desire to help the economy avoid recession with the need for a somewhat restrictive monetary policy.
Impact on investments
In light of these improved economic predictions, UBS has advised investors to maintain a diversified portfolio of equities, bonds, and alternatives.
Based on UBS’s capital market assumptions – which relied on equilibrium return assumptions – the company estimates that a portfolio of 45% stocks, 35% bonds, and 20% alternatives could deliver a return of around 5% in excess of cash annually over the longer term, with an annualised standard deviation of around 9%.
That translates into an expected return of 2.7– 4.3x vs. cash over a 20–30-year timeframe.
