The past 18 months have been a timely reminder of the need for diversification and 2024 looks like it will be no different, says Darius McDermott, managing director of FundCalibre.
For my final column of the year I usually try to focus on the positives and where the best opportunities may sit next year. But on this occasion I’ve decided to step away from the norm.
To be clear, there are areas I do think look attractive. The UK is ridiculously cheap, bonds are the safest bet and the brave among us will look at China and realise this an extremely attractive entry point. But as we head into 2024 there remain a number of headwinds hitting the global economy – namely inflation, the threat of war and the ongoing impact of Covid in certain parts of the world.
Thus far the global economy has dodged recession in a way that any fleet-footed boxer avoiding a fast right hand from Mike Tyson would be proud of. But there remain significant fears that we may not be so lucky in 2024. If, when and how deep, a recession will be, still remain open to conjecture.
All those challenges are very real, which is why I feel a balanced and diversified approach to markets has to be the obvious play in 2024. So, it is fortunate that I have done a whistle-stop tour of a number of global multi-asset managers to get their views on markets heading into next year.
The lack of consensus is a reflection of the uncertainty in markets. Figures from the International Monetary Fund predict global growth is forecast to slow from 3.5 per cent in 2022 to 3 per cent in 2023 and 2.9 per cent in 2024*. The projections remain below the historical (2000–19) average of 3.8 per cent*.
WS Wise Multi-Asset Growth manager Vincent Ropers says we are still in a transition period, where questions over inflation and interest rates peaking are still being asked. He says now is not the time for a big macro call, choosing instead to have made a number of idiosyncratic bets where the team think there is a greater margin of safety due to valuations.
Others believe recession is possible, not probable in 2024 – adding that even if this were the case, it could be shorter and, importantly, less painful because many are already expecting it.
But it was Orbis Global Balanced fund manager Alec Cutler’s view on the wider economy that caught my attention most. He feels there are four negative contributors to the economy (higher levels of inflation; the “scary” levels of indebtedness; rising global conflict – and the impact it has on international trade; and valuations) which he has aptly named the “four horseman of the stock apocalypse”.
“I am a contrarian, but it pays to be growth and have an optimistic view of the world. But I must say I am looking at those four concerns and they are to some degree impacting each other on the negative side” he adds.
Bonds lead equities
The sharp rise in bond yields has resulted in a number of multi-asset managers beginning to dial down their alternatives exposure in favour of traditional fixed income in the past 12-18 months. To my mind bonds still look the safest option heading into next year, given the capital uplift many investors will see, should interest rates start to fall.
We’ve already started to see some of that since October (when market expectations on rate peaks changed as central banks looked set to stop their cycle of continually raising rates). Since this point we’ve seen the returns for all four major Investment Association bond sectors (high yield, corporate bond, strategic bond and UK Gilts) produce strong performance**.
Some, like Aegon Diversified Monthly Income manager Vincent McEntegart, have started to dip their toe into longer duration (currently the portfolio has an average duration of 2 years)***. One of the principle reasons for this is the fear of inflation spiking again, causing bond yields to rise.
Equities and other opportunities
Much of the returns for equities have been driven from a narrow base – namely the “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla). All of which have produced stellar returns – bolstered by the AI theme. But fears remain about whether they are now trading at sustainable valuations.
But again, there is by no means a consensus. BNY Mellon Multi-Asset Balanced manager Simon Nichols says big tech can continue to outperform, citing Nvidia as an example.
He says: “Nvidia are designing computer chips that are making AI programs possible. The stock is up over 220 per cent year-to-date. But when we look at the earnings at the start of this year and look at the earnings that the market was expecting in 2025 those earnings expectations have actually moved more than the share price. So Nvidia is on a lower PE rating now than it was at the start of the year.”
Cutler says equity markets are very expensive versus history. As a result, he has a number of defensive positions in the portfolio, having bought Treasury Inflation-Protected Securities, or TIPS, 18 months ago when they were yielding 1 per cent (they are now yielding between 2.5 and 3 per cent)****. He also has a 10 per cent position in gold and an overweight to energy stocks****.
But there are other opportunities, I’ve talked extensively about investment trusts – where the average discount is now approaching levels not seen since the Global Financial Crisis. We’ve tapped into areas like infrastructure, where some vehicles have given us longer-duration assets at near 40 per cent discounts. But there are also other opportunities which look attractive over the longer term.
Waverton Multi-Asset Income manager James Mee says his team are finding ideas across global equities and real assets. He also adds that if inflation were to fall back to 2 per cent, he would expect his portfolio to be in a strong position. He says: “I think some of the real asset names could double and we should get 20 per cent from our fixed income positioning^. We’ve also got credit in there, which should also perform well in that environment.”
Investment portfolio diversification is a tried-and-true strategy that aims to strike the right balance between risk and reward. It sounds simple in practice – but is something which can easily be forgotten when bull markets are raging. The past 18 months have been a timely reminder of this and all the evidence suggests 2024 may be an extension of the lesson.
Funds to consider
M&G Episode Income is a multi-asset fund that invests directly in individual stocks and bonds, while property exposure is achieved by investing in property funds. The name ‘episode’ refers to those periods of time when investors’ emotions cause them to act irrationally and thereby open up opportunities for those who can put their emotions aside. Manager Steven Andrew uses behavioural finance to find pockets of value and invest against the herd, rather than following it
VT Momentum Diversified Income looks to produce a high level of regular income, with the prospect of preserving the real value of capital in the long term. The managers have a value-focused style and will invest across all asset classes including UK and overseas equities, fixed income, property and specialist investments held through third-party funds.
Jupiter Merlin Balanced is a multi-manager fund which can have between 40-85per cent in equities and aims to provide capital growth and a decent level of income. One of Jupiter Merlin Balanced’s key features is its conviction-led portfolio, built without reference to the peer group benchmark, an approach that seems to have helped the fund produce top quartile performance in the IA Mixed Investments 40-85% shares sector over three and five years^^.
*Source: IMF, World Economic Outlook, October 2023
**Source: FE Analytics, total returns in sterling, 30 December 2022 to 11 December 2023
***Source: Aegon, November 2023
****Source: Orbis, November 2023
^Source: Waverton, November 2023
^^Source: FE Fundinfo, total returns in sterling, 11 December 2020 to 11 December 2023
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
Main image: loic-leray-fCzSfVIQlVY-unsplash
