07 Dec 2023 3 min read

What next? Skirting risks, harvesting yields

By Sonja Laud

As inflation and growth dynamics vie with political risk for investor attention next year, we anticipate fresh volatility - and opportunity - in this higher-rate environment.


The following is an extract from our latest CIO outlook.

This has been yet another extraordinary year for investors – from the concentration of gains in a handful of stocks, to the rapid and synchronous rate hikes in developed economies, to the whiplash in bond markets.

To assess the outlook for 2024, we clearly need to consider a large range of scenarios. And yet we believe that almost regardless of how growth and inflation dynamics play out, investors should expect fresh volatility.

As throughout 2023, outsized moves are likely, as market participants continue to recalibrate their expectations of monetary policy in light of new economic data. Political risk will also need to be priced, and re-priced, with more than two fifths of humanity going to the polls.

The US, EU and India are scheduled to hold elections; the UK may well follow suit. Taiwan’s presidential election – in which the country’s relationship with China will likely feature prominently – is set to take place in January.

In this outlook, teams from across LGIM assess the investment implications of this backdrop, while ever mindful of the need to be humble in their conclusions.

Key takeaways include:

  • Our base-case economics view suggests the US Federal Reserve (Fed) may cut rates more aggressively than the market expects
  • We favour duration and take a selective approach to corporate debt, in light of tail risks and after the current bout of investor optimism
  • Yield levels, technical factors and economic resilience may support emerging market debt
  • 2024 could be the year of a multi-asset revival
  • Higher rates may buttress private credit returns, but debt servicing could become an issue

We also outline why we believe credit can play an important role as defined benefit pension schemes focus on their endgame, whether their target is buyout, low-risk self-sufficiency or surplus generation through run-off.

And we examine how geopolitics informs our thinking about long-term themes, such as cyber security, clean water and ‘friend-shoring’.

Ongoing conflicts

Geopolitics is indeed very much top of mind. The invasion by Russia of Ukraine last year highlighted how the decades-old, US-led world order is fragmenting. The new, tragic conflict between Israel and Hamas further highlights the perilous nature of an increasingly multipolar world.

Investors also need to consider US-China tensions and rising political populism. We are all also still living in the shadow of COVID-19, which wrought so much pain alongside so much change.

It is safe to say that these themes will feature prominently in the elections next year. But it’s also clear that this geopolitical turbulence means the world will struggle to rise to some of the challenges it faces, not least climate change.

Our outlook has been published during the COP28 climate summit, which presents another chance to tackle this generation-defining problem.

We fear that without global collaboration on a scale we have never seen before, this and future such opportunities will be missed. World leaders need look beyond short-term interests and focus on the long-term action urgently needed. The same is true of companies critical to the energy transition.

At LGIM, we are clear on our role: to create a better future through responsible investing. This involves recognising both the risks and opportunities posed by this fast-changing investment landscape, understanding their structural drivers, and seeking to address them on behalf of our clients.

The above is an extract from our latest CIO outlook.

Sonja Laud

Chief Investment Officer

Sonja is CIO of LGIM, having joined the business in January 2019 as Deputy CIO with responsibility for LGIM’s Solutions, Global Fixed Income, and Active Equity teams. Sonja joined from Fidelity International where she held the title of Head of Equity, responsible for the Global, Equity Income and UK Portfolio Managers as well as the Investment Director team.

Sonja Laud