The last quarter of 2023 saw a pivot away from the steeply rising interest rate environment that has shackled markets since the end of 2021. With inflation starting to fall, central banks like the Fed, Bank of England, and the ECB signalled not only a pause to rate rises but also the potential for rate reductions later this year. Markets reacted with bonds rallying and equities recovering strongly towards the end of the year. So, what should investors look out for in 2024?
“Good to see you back, Bond” (Casino Royale) – Are bonds (the fixed income asset class, rather than the eponymous spy) also back?
After years of nugatory returns, the opportunities in fixed income markets started getting significantly better last year. Among the many ‘zombie’ companies that clung on to solvency while interest rates were on the floor, default rates will inevitably rise along with the cost of their borrowings. The careful investor, however, will be rewarded by the returns from both capital and income within this asset class. Gilts (Government-guaranteed bonds) , which for so long offered negative real rates of return during the era of QE, will re-establish their proper role in a portfolio as low-risk portfolio-anchors (one hesitates to recall the spy’s terse rejoinder to M’s acid welcome: “I never left”) The long years of financial repression meted out to savers and low-risk investors since the Global Financial Crisis of 2008-09 look like being finally over.
UK (and non-US) Equities
Could the stark valuation (and performance) differences between US and non-US equities finally tempt investors to reallocate funds from one to the other? US equities, with their heavy weightings in the buoyant tech sector, have risen almost 150% over the past ten years. Non-US equities (viz., the MSCI All-World ex-US Index) are up a mere 10% in dollar terms. US equities now represent 63% of the All-World Index – a headache for index-huggers. Some non-US equities, especially UK equities, now look cheaper than at almost any time in the last thirty years. Among UK equities, some investment trusts have been trading at extraordinary discounts to their net asset values; opportunities abound.
Corporate reforms and the Yen’s significant undervaluation against the US $ may finally reverse the long decline in interest in Japan, with a range of effects felt in the EU’s industrial base, further damage to China’s dominant property and banking sectors and the destabilisation of the renminbi-based Asian monetary system. With inflation rising (now at 3%+), the Bank of Japan will have to abandon its yield curve control policy, allowing the ¥ to appreciate. This should be a catalyst for a stronger currency and a boost to Japanese assets.
Wars, elections and canals (Geo-politics!)
The West’s war-by-proxy with Iran could easily morph into something uglier in the Near/Middle East than just Israel vs Hamas. On the other side of the coin, continued stalemate in the Ukraine conflict - or even a move towards the negotiating table by the main combatants, although unlikely in the near term - could produce a more positive environment for certain markets. Two billion electors go to the polls this year. The election of new politicians creates uncertainty and fiscal change. The re-election of old politicians creates the illusion of continuity. Drought in the case of the Panama Canal and Houthi piracy in the case of the Suez one, highlight the vulnerability of global supply chains; the effect on the price of goods can only be one way. Our global inter-connectedness means the sands now shift more quickly under investors’ feet than is often appreciated.
All that glitters...?
Among all this instability, is gold re-establishing a more permanent role in investors’ minds? The precious metal usually gets a bashing as a portfolio investment because it does not deliver an income yield and so cannot be anchored to any consistent valuation metric. Nevertheless, it has delivered an average annual return of 6.5% over the past eight years. Many view it as the ultimate insurance against profligate governments debasing their fiat currencies. It currently trades at all-time highs. Bitcoin and other unregulated ‘alternative’ assets come with all sorts of caveats. Buyers beware.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements.
Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.