Bedrin-Alexander
Dive into 2024 with an analysis of ten key investment themes that will drive strategic asset allocation decisions in the year ahead.
As the calendar turns to 2024, we stand at the cusp of a financial landscape that promises both challenges and opportunities in equal measure.
Across many conversations with financial advisors, I’ve taken the pulse of these factors to craft a detailed map of the current investment environment. Here’s my take on the ten themes that will have the most impact on portfolios in 2024:
1. The Revenge of the Dots
As the adage goes, the only certainty is uncertainty. In 2023, the Fed’s dot plots led us on a merry dance of rate expectations, swinging from cuts to hikes and back again.
This back-and-forth has seen policy expectations diverge by over 200bps in just a year. In my conversations, I’ve advised people to approach the dot plot with a dose of healthy skepticism, given their spotty track record.
Despite the market’s current bet on rate cuts in 2024, it’s better to stay focused on economic indicators, especially around inflation, unemployment, and liquidity conditions, to preempt any reactive policy shifts.
2. Soft Landing or Turbulence Ahead?
The debate over the economic trajectory of the U.S. is a hot topic in my meetings. Although the ‘soft landing’ scenario seems to be in favor as we start the year, I remind advisors that the stubbornness of the Fed in its inflation battle could change the narrative.
The 3 P’s — Positioning, Profits, and Policy — are what I’m stressing as the indicators that could signal a shift back to risk assets.
Against this backdrop, areas to consider include corporate credit (investment grade and high yield) and emerging markets, as well as cyclicals and small and mid-cap companies.
3. MOVE to the VIX
In 2023, bond market volatility was the headline act, but I’m preparing advisors for a role reversal in 2024. Equity volatility is likely to step into the spotlight, driven by the uncertainties around growth, inflation, and corporate earnings.
On the bond side of the equation rates are likely to be a bigger driver of total return in 2024 relative to spreads. I’m advising a strategic pivot towards high-quality assets with moderate duration as we anticipate a flatter interest rate environment.
4. High Yield Bonds – Spread Offense
Despite the sell-off in high yield bonds this year, I’ve been encouraging advisors to look deeper. With yields at historically high levels and quality on the rise, I believe that BB-rated bonds represent an opportunity for measured exposure in the high yield space.
With yields in the high 90th percentile of their historical range and prices around $90, these starting points have historically signaled double-digit returns over the next year.
Over half of the issuers in this space are BB-rated, signaling higher quality and larger capitalization, with robust fundamental drivers. We’re encouraging advisors to consider the 550-700 bps spread range as a strategic entry point and a rotation up quality towards BB rated bonds for strategic high yield allocators.
5. Discovering Value in the “Wee 493”
The overwhelming influence of the “magnificent 7” stocks skewed S&P 500 returns in 2023, with >70% of the broad market index’s total return being explained by these 7 companies.
In fact, just 10 stocks are responsible for nearly the entire positive return of the S&P 500 in 2023. While the disproportionate impact of a few large caps on the S&P 500 returns has been stark, investors should not lose sight of small and mid-cap stocks, which tend to lead in an economic recovery.
Small and mid-sized companies should also benefit from more stable and potentially downward-biased interest rates in 2024. Outside of small caps, cyclicals (value) should be on investors’ radars for 2024 as well, given their higher level of economic sensitivity and relatively attractive valuations.
6. Digital Assets Get a Seat at the Grownup Table
Over the past several years, I’ve had in-depth conversations about the maturation of digital assets. 2023 was no exception, especially as we anticipate the launch of Spot Bitcoin ETFs in 2024.
I believe this will be a significant milestone, potentially integrating digital assets into traditional investment portfolios.
As this unfolds, we should begin to see a large-scale adoption of this exciting asset class into traditional model portfolios and predict a multibillion-dollar bitcoin ETF market by the end of 2024.
I’m excited about the prospects and am working with advisors to appropriately position for this evolution.
7. Political – Geopolitical Soup
For advisors, it’s crucial to differentiate between meaningful trends and mere noise. With a slew of global elections on the horizon, I’m focusing on the potential market impacts without getting caught up in the political fray.
We’re keeping an eye on debt, deficits, and global conflicts, assessing how they might influence investment decisions.
As political noise ebbs and flows throughout the year, it’s important to remember that political change and geopolitical conflict have had more temporary than lasting impacts on asset prices.
8. King Dollar Gives Up the Throne
The dollar’s strength has historically been tied to interest rates, and as we’ve seen some softening as markets anticipate lower rates in the U.S., a trend that could continue into 2024.
This could herald a period of opportunity for emerging markets and select G10 currencies, along with gold. We’re examining these areas for potential diversification opportunities.
9. China: The Bull in the Global Shop
Investor sentiment towards China remains decidedly bearish, influenced by the country’s slower-than-anticipated recovery from the COVID-19 pandemic, distress within its real estate sector, stringent technology and intellectual property regulations, a global shift towards domestic production, and broadly negative views on its geopolitical actions.
However, there’s a silver lining: Much of the current skepticism appears to be factored into market prices. Chinese stocks are trading at compelling valuations not seen in years, and the corporate debt sector is showing signs of having weathered the worst, particularly in real estate.
Simultaneously, other emerging market nations, including India, Brazil, Mexico, Saudi Arabia, and Vietnam, have gained from China’s difficulties, experiencing both developmental progress and improved investor sentiment.
My advice: While continuing to capitalize on the strong performance of these “new” emerging markets, it’s prudent not to dismiss China entirely.
The current valuations present potential opportunities for strategic investment, especially as the market may have already absorbed the impact of China’s recent challenges.
10. Pain in the Real Asset
The commodities market has been a source of both opportunity and frustration. The inflation trade roared back in 2022 and went into divergence mode in 2023 with energy and precious metals posting positive returns, while areas such as soft commodities and industrial metals lagged.
This left many commodity investors frustrated by getting the call right but the allocation wrong in many cases. Looking ahead, continued divergence in commodity fundamentals, momentum and trend should create a better setup for active real asset allocations relative to passive in 2024.
Important Disclosures
Coin Definitions
Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
“Magnificent Seven” refers to the group of seven mega-cap tech stocks in the S&P 500 that consists of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla.
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