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The past 12 months have been challenging for investors. Countries have confronted the prospect of both stagflation and recessionary pressures, with central banks finally starting to tame inflation in the latter half of 2023.
Geo-political conflict, meanwhile, continues unabated – from Russia’s war with Ukraine to violence in the Middle East.
This year has also seen artificial intelligence cement (AI) itself as part of the long-term technology narrative, while environmental issues continue to pre-occupy the minds of governments and protesters alike.As if this were not enough, 2024 will witness landmark elections in both the UK and US.
We asked a panel of experts – Rob Morgan (RM), chief investment analyst, Charles Stanley; Justin Onuekwusi (JO), chief investment officer, St James’s Place; Kasim Zafar (KZ), chief investment officer, EQ Investors; Claire Bennison (CB), director of investment solutions, Tatton Investment Management; Jason Hollands, (JH), managing director, Bestinvest; Arlene Ewing (AE), divisional director, Investec Wealth & Investment (UK); Karen Lau (KL), investment director, JM Finn – to address key questions facing retail investors as we approach the new year.
What’s the most important guidance you can give to investors for the year ahead?
RM: Don’t be excessively negative or positive. Keep an open mind so as to be flexible to opportunities as they arise.
JO: Stay invested and resist the temptation to ‘time’ the markets – even the professionals can’t do this well. Remember that the biggest risk to maintaining and building wealth is inflation.
KZ: The market is very ‘noisy’ and it’s easy to get sucked into different narratives. Remember your long-term investment strategy and maintain your discipline.
CB: Stay diversified because diversification helps to limit the downside to investments. This leaves investors in a better position to weather the investment curve balls that occur every year.
JH: Investors should stay focused on their long-term goals and not allow themselves to get blown-off course by short-term noise and news events. When the headlines are bad, it’s usually a great moment to invest, but it never feels like it at the time.
AE: Remain invested in stock markets and segregate some funds in a high-interest paying bank account to maximise your opportunities.
KL: When the market turns, it can rebound quickly. Stay in quality companies with low debt and a strong record of surviving difficult markets. Investors in the S&P 500 who missed the 10 best performing days in the index between 2003 and the end of 2022 would have lost out on over 50% of returns during that time period.
How can investors best position their portfolios against a backdrop of higher-for-longer interest rates?
RM: Higher interest rates on cash are helpful for savers and it is tempting to ‘park’ money here. But, as time goes on, investment opportunities will increase as interest rates and inflation fall back. Investors stand to be well compensated by both government and corporate bonds in particular.
JO: Higher interest rates have made it worth revisiting the fixed income sector, which has been easy to overlook with over a decade of near-zero base rates. Within fixed income, pockets of the high-yield bond market are producing low double-digit yields, while investment grade bonds are in the mid- to high- single digits – both of which are not to be sniffed at.
KZ: Bonds now offer compelling returns, so they should feature prominently in portfolios again with a bias, for now, towards short-term maturities. Turning to equities, a focus on high-quality companies that are better able to manage higher costs of capital will mean investors can sleep better at night.
CB: It’s tempting to choose cash, but this doesn’t beat inflation over the longer term. ‘Higher for longer’ central bank interest rates will allow investors to use bonds to generate a return, while we wait for the cycle to roll over.
JH: Consider locking-in some exposure to government bonds while yields remain at currently attractive levels. Many investors have ignored this asset class since the global financial crisis and instead solely focused on equities. We are in a different environment now and bonds can provide some welcome diversification.
AE: Through the addition of short-term government gilts, good quality bonds, stocks paying good levels of income, and also commodity stocks.
KL: Quality defensive companies with progressive dividend policies serve investors well where they are being paid an income while also allowing opportunities for growth.
Inflation remains well above central bank targets. How can investors take advantage?
RM: We have more of an issue in the UK with inflation than most other countries, so exposure to overseas assets could help offset a weak pound in the event our inflation journey is longer and bumpier than expected.
JO: Inflation that stays above central banks’ 2% target is bad for consumers’ wallets and their uninvested savings. Making sure those savings are not eroded by heightened inflation is more important now than it’s been in the past 40 years.
KZ: Both ‘headline’ and ‘core’ inflation are falling, but it could take some time for levels to return to central bank targets. This means the short end of the yield curve is likely to remain elevated and makes short duration and floating rate bonds attractive.
CB: By starting to lock in bond yields now in anticipation of a fall in rates in 2024/2025. This is already quite a crowded trade. But it’s one that can, on current levels, still prove beneficial.
JH: Pick out companies that are able to pass on inflationary cost increases to customers without sacrificing their margins and are not vulnerable to being undercut on price. Companies with unique intellectual property rights and high recurring contractual income both fit into this camp.
AE: Investing in real assets including stocks and shares, commodities, and property. Gold could also play a role.
KL: Quality infrastructure holdings and property investments with no, or low, debt that provide inflation-linked income are worth seeking out. There are a few gems for investors who take the longer-term view.
How will geo-political conflict affect investors in 2024?
RM: Markets need to get used to the new normal. The world has split into blocs and competition is rising between the US-led democracies and a Chinese-led group, creating more uncertainty. Investors should expect some continuing trade disruptions, but most areas will muddle through.
JO: The 2024 US Presidential Election could derail equity markets, particularly if the polling suggests it will be a closely fought battle, or if rhetoric becomes too extreme. The unfortunate reality is that war means increased defence spending and certain companies can benefit from increased government defence budgets. That said, war completely ravages the countries and economies where it is taking place, highlighting the importance of geographic diversification.
KZ: This unsettled environment is set to continue next year and could lead to bouts of higher inflation, through supply chain disruption and commodity price volatility. It can also lead to restrictions on certain companies and/or sectors. Maintaining broad diversification should help to mitigate these risks.
CB: A likely UK general election, plus the US presidential contest, means politics will remain a key focus for investors. Markets, however, may not factor in the implications of these results until later in 2024.
JH: Ongoing wars in Ukraine and the Middle East are concerning. In both cases, however, fears that these might escalate into wider, regional conflicts have significantly abated despite sabre-rattling from both Russia and Iran. Notably, oil prices have retreated significantly from their September peak, despite the Israeli-Hamas conflict.
AE: The knock-ons can be numerous and far-reaching, from the impact on energy prices to restricting the flow of people, especially if nations such as China and the US become more involved. Market uncertainty and high levels of volatility can produce large outflows of capital from markets and into banks. No-fly zones restrict flights and holidaymakers, in turn causing an impact for growth on countries that depend on tourism.
KL: Not forgetting the human tragedies involved with war, it is likely that we will continue to see volatility in global markets. Investors should hold their nerve and concentrate on quality companies and on building a portfolio with a long-term view.
Which investment sector or region will flourish next year?
RM: There are significant opportunities in both government bonds such as UK gilts currently, and in corporate bonds where income between 5% and 6% is easily achievable without much credit risk and can be locked in for a long period.
JO: Equities outside of the US. In fact, equities outside of the top 10 largest US stocks look relatively attractive given that most of 2023’s returns have come from a narrow selection of tech-related companies. Emerging markets, Europe, and the UK equity markets also look attractive for where we are in the economic cycle.
KZ: The US economy seems the most insulated from various shocks that could occur next year and is already further along in its monetary cycle than most other regions. Look beyond the so-called ‘magnificent seven’ US mega cap tech companies and a strategy biased to US small capitalisation stocks could be successful in 2024.
CB: Regionally, it is always hard to bet too much against the US, although emerging markets remain a key opportunity. If you believe that bond yields have reached a peak and that inflation is falling, then generally defensive sectors such as utilities and telecoms have historically outperformed against this backdrop.
JH: I would advocate a relatively defensive approach favouring healthcare and consumer staples as sectors which are typically resilient in periods of economic weakness. I also think there are opportunities in energy shares, where valuations are incredibly cheap.
AE: AI could be the emerging sector to succeed as major players such as Apple, Microsoft and Tesla continue to dip their toes in the space.
KL: The US remains the strongest contender to lead us out of the current economic climate. The healthcare sector has underperformed this year and I believe we may see a recovery as this is a solid long-term investment theme.
Santa gives you £1,000 to invest. Which fund or share do you choose?
RM: Opportunities abound in investment trusts where the average discount to net asset value (NAV) has widened to levels last seen 25 years ago. BlackRock Smaller Companies Trust at a 10% discount to NAV has suffered from this trend, plus it invests in a cheap area of a cheap market to boot.
JO: Assuming I already have a diversified portfolio and no interest-bearing debt to pay off, a fixed income fund that can take advantage of opportunities across the ratings and duration spectrum. In equities, Japan has some interesting market dynamics that could benefit investors over the next decade. The regulator is looking to implement a host of pro-shareholder reforms and Japanese companies are sitting on piles of cash.
KZ: For a long-term horizon, the answer is easily the Sanlam Global Artificial Intelligence fund. For investors needing greater certainty in the short-term, we like the Vontobel TwentyFour Sustainable Short Term Bond Income fund.
CB: I would invest in a structured return fund such as the Atlantic House Defined Return Fund. It aims to deliver 7% to 8% over the medium- to long-term and invests primarily in UK government bonds. Given its construction, it generally provides more predictable returns in different market scenarios.
JH: UK equity valuations are the cheapest they have been in a generation with a lot of doom and gloom already priced in. I love a bargain and think Temple Bar Investment Trust is a great way to scoop up unloved stocks.
AE: Greggs, the bakers, whose dearer rivals are driving footfall and spend towards the company. As cost inflation eases, store openings continue, with the company’s management demonstrating an understanding of its consumers from both a products and pricing perspective.
KL: Microsoft. The company has been proactive working on acquisitions and building up partnerships, such as the 10-year agreement it announced last year with the London Stock Exchange. Its recent hire of former OpenAI boss, Sam Altman, also demonstrates Microsoft’s focus on the future.