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Russia might yet escalate its war in Ukraine, while a global recession remains an uncomfortable possibility. But alpha generation potential should increase and liquid alts will be “crucial” as growth uncertainty persists.

A global recession can’t be ruled out in the face of slowing global growth, but that could be good news for asset prices if the slowdown is shallow, according to Allspring Global Investments. Meanwhile, elevated interest rates are likely for at least the first part of 2024, with consumer demand likely to fall accordingly. And the conflicts currently raging around the world might get hotter.

“There are currently two main hot spots, and either one could trigger a global equity sell-off,” John Hockers, Allspring co-head of investment analytics, and Matthias Scheiber, head of systematic multi-asset, wrote in Allspring’s 2024 investment outlook.

“Russia may conclude it’s losing in Ukraine and pivot its strategy to include expanded environmental or nuclear terrorism to halt Ukrainian advances; (and) a direct conflict between Iran and Israel or Iran and the US could put Persian Gulf energy supplies at risk.”

And with the remote working trend showing no sign of abating, companies are reducing office space; that means fewer tenants for commercial real estate owners, while higher interest rates complicate debtors’ ability to meet interest payments, driving higher delinquency rates. Meanwhile, inflation is likely to fall but stick around.

But – as in all things – it’s not all bad news. Fixed income is likely to provide a more compelling investment opportunity, with a recession potentially driving a rally in high-quality, long-duration bonds. Ongoing geopolitical risk means money market yields are likely to remain robust, while higher short-term interest rates will lead to wider dispersion in the year ahead.

“Our analysis of historical trends indicates an optimistic outlook for major asset classes given inflation’s retreat into a “medium” two to four per cent range,” the outlook says. “The initial impact may be mixed, but alpha opportunities should increase. US small cap stocks hugely underperformed in 2023 but could stage a 2024 comeback. We see value in US bonds for 2024 given higher real yields.”

Emerging market equities (excluding China) are primed for outperformance as local currencies increase in value relative to the US dollar, while US dollar denominated debt costs could decline too. And sticky inflation could favour real-return strategies focused on equities and higher-income bonds, while diversification using liquid alts “could be beneficial”.

“Higher interest rates should make liquid strategies more attractive than illiquid strategies,” the outlook says. “Focusing on liquid alternative investments could be crucial as growth uncertainty persists. High asset class correlations can compromise diversification. Market-neutral and alternative real-return strategies offer uncorrelated returns to traditional assets.”