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As developed economies move past peak inflation, and major central banks approach the end of a two-year interest rate hike cycle, advisors should prepare their clients for slower economic growth in 2024.

As discussed in the Mackenzie Investments 2024 outlook report, the Bank of Canada is expected to keep interest rates at a high level until more material signs of lower inflation appear, thereby continuing to restrain interest-rate-sensitive areas of the Canadian economy, such as real estate. Additionally, ongoing geopolitical tensions may continue to impact stability in commodity markets as well as demand for riskier asset classes.

This slower global growth outlook, combined with higher interest costs on debt, is expected to increase fiscal pressures gradually for many countries in 2024, including Canada.

Despite slowing economic momentum, it’s not all doom and gloom for the year ahead. In fact, there are three key areas of opportunity for investors to take advantage of in 2024.

Bonds to drive returns

As inflation normalizes and the end of the rate hike cycles nears, global economies are navigating a higher-for-longer interest rate environment. Yield curves will remain a major theme in 2024 and should remain flat or inverted but stabilize after almost two years of volatility.

So, what does this mean for investors?

Stability at these yield levels makes bonds an attractive asset for income-oriented investors for the first time in over a decade. Consider Canadian investment-grade corporate bonds, which offer yields in the range of 6%. And diversified high-quality bond portfolios are in a better position now to provide balanced portfolios with a negative correlation to equities if a market correction materializes.

To add to this favourable dynamic, corporate bond spreads should be relatively stable for higher-quality issuers because these companies are entering 2024 with fundamental strengths, such as high-interest coverage ratios.

However, there are still risks in a higher-for-longer interest rate environment, within rates and certain areas of credit markets such as those exposed to the consumer balance sheet, so be aware of any hazards moving forward.

The great energy transition

Despite urgent calls for a faster global energy transition away from fossil fuels, 2023 wasn’t a great year for clean energy investment sectors. Investors were drawn to the attractiveness of other sectors, such as artificial intelligence (AI), while the wind and solar spaces faced significant challenges related to increased costs in the past year.

But that doesn’t mean investors should give up on clean energy just yet. On the contrary, the next year is expected to bring continued investment and advancement in solar generation and storage, electric vehicle manufacturing, and infrastructure, with a more prominent place for natural gas with carbon capture technology to meet climate targets. The apparent slow progress toward achieving global climate goals further highlights the importance of the great energy transition and continues to support greater investment in this secular investment theme.

Much of the energy transition involves investing in infrastructure that delivers essential services. These assets have a long capital life, with stable, predictable long-term cash flows linked to inflation. In 2024, private markets will be well positioned to fund these assets, setting the stage for investment over the next several decades.

Finally, investors shouldn’t neglect the role the resource sector continues to have in this transition away from more traditional energy sources, including high-carbon fossil fuels, to new renewable sources and natural gas, which has a smaller carbon footprint. Basic materials will still play an important role in the production, transmission and storage process. Because of recent weak performance and the continued investment required for the energy transition, there’s a lot of opportunity to make outsized returns in this space. Additionally, advisors can help clients match their values with their investments for a win-win scenario.

Innovation and growth

In this environment of higher interest rates and stickier inflation, investors will have to navigate a challenging reality if they seek durable growth. There are opportunities in businesses with strong competitive positions, high barriers to entry and healthy balance sheets. As examples, AI and the experience economy represent compelling areas for growth and innovation in the year ahead.

For AI the early winners have been chip companies. But in the next wave of innovation in this sector, there are sure to be successes in the enterprise software space among companies with the ability to monetize AI-powered applications — either through driving additional revenue sources or optimizing costs. Future applications of generative AI have potential across many sectors, notably health care, consumer and industrial end markets.

In the experience economy, we see significant momentum ahead for innovation in the delivery and experience of live performances as well as unique world-class travel experiences.

To capitalize on this growth potential in 2024, investors should remain diversified, maintain a portfolio that is aligned with their risk tolerance and focus on durable quality investments. To determine long-term winners, advisors must scrutinize the health of a company’s balance sheet, assess management’s ability to prudently invest for growth while competitors retrench, and ensure the business can navigate volatile financing conditions.

Lesley Marks is chief investment officer of equities with Mackenzie Investments.