This New Year, investors find themselves facing a profound economic shift, where the tide of cheap money that has buoyed markets for years may be receding. The recent market rally, propelled by antici- pation that major Western central banks may raise and not cut interest rates, paints a picture of optimism. However, beneath this surface, storm clouds are gath- ering, and 2024 could hold surprises that test the con- victions of even seasoned investors. The conviction in the market stems from the belief that the Federal Reserve is orchestrating a soft landing for the US econo- my, taming inflation without triggering a recession. This optimism is underpinned by the unexpected resilience of the US economy, cushioned by pandemic savings and the nation’s allure as a safe haven for investments. While some argue that the Fed has a track record of managing soft landings, the prevailing sentiment among investors and executives is scepticism. Investors are placing bets on the Fed cutting rates by as much as 1.5 per cent by the end of 2024. However, even with such a cut, policy rates would still hover around 4 per cent, a level not witnessed for the past two decades. This depar- ture from the era of ultra-low rates carries implications for the economic ecosystem. Monetary policy, once a stimulant, could become a drag on growth, hovering above the so-called neutral rate where the economy nei- ther expands nor contracts.

Adding to the complexity are geopolitical tensions and the prospect of major conflicts, ushering in a reverse globalisation trend. The spectre of contentious US elec- tions further clouds the outlook for 2024, injecting uncertainty into an already delicate economic land- scape. This matters because interest rates, the linchpin of economic dynamics, influence everything from asset prices to borrowing costs. Higher rates make riskier as- sets less attractive, affecting technology stocks and cryp- to-currencies. The tightening of money supply can lead to failed risky bets and burst bubbles, reminiscent of the US regional banking crisis last March. As businesses struggle, retrenchment follows, causing job losses and scarcity in the job market.

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The transition to a period where money is no longer cheap implies that companies and even countries must restructure debt liabilities. Emerging markets are already witnessing this in debt negotiations and a surge in bankruptcies. Sectors like commercial real estate, grappling with the repercussions of the pandemic, will likely face more pain. Office markets adapting to new ways of working post-pandemic are witnessing a reval- uation of portfolios. This domino effect carries losses for banks and investors. For consumers, the transition means higher borrowing costs. Many have become accustomed to decades of low interest rates for mort- gages, and the adjustment to rates more than twice as high poses a budgetary challenge. As we traverse the uncharted waters of 2024, investors’ convictions will undoubtedly be tested.