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Cautiously optimistic

04 December 2023 Old Mutual Wealth Investment Strategist, Izak Odendaal

‘Tis the season. For year-ahead outlooks, that is. It is the time of year when banks, fund managers and the investment commentariat at large gaze into crystal balls and prophesize about the planet’s next rotation around the sun. This week’s note will do the same, while next week we will attempt to look even deeper into the future.

Unpredictable
Before we get there, two obvious caveats. Firstly, the future is unpredictable. If you didn’t know that before Covid, you certainly do now. Therefore, rather than obsess over exactly what is coming our way, we should focus on ensuring that our portfolios are robust across a range of different scenarios. We should also spend a lot more time worrying about those things others are not worried about, since these are the events or outcomes that are not fully discounted by markets. Secondly, months and years are quite arbitrary distinctions in a world where markets trade continuously round the clock, and one day bleeds into the next. Still, the human brain likes compartmentalising and putting things into discreet boxes. So here goes.

The big surprises this year – again illustrating the folly of forecasting – were the unexpected resilience of the US economy despite much higher interest rates and the unexpected weakness of the Chinese economy despite ending lockdowns. These are also areas to think about as we head into 2024.

US exceptionalism
At the start of the year, the US economy was widely expected to fall into recession. That didn’t happen as consumers kept spending, supported by ample savings and a healthy labour market. For the US economy, indeed the global economy, the strength of the American consumer is key. They also benefited from the rise in real income as inflation fell during 2023, buoyed by solid wage gains.

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