UBP House View - January 2024

Key takeaways

Editorial

2023 will remain the benchmark year post-covid.

2023 was a year marked by an increased lack of visibility, whether on where inflation is going, general macroeconomic risks surrounding all asset classes, or rapid rotations. Despite all this, cash will have been the worst-performing asset class, clearly demonstrating that a wait-and-see attitude is rarely a good strategy.

There are clear conclusions that can be drawn and lessons that can be learned from the past year. The return of interest rates to their long-term averages puts portfolio construction front and centre. In other words, in 2023, we had to wait until the last two months of the year to see our market scenario crystallise, with record performances for equities and a complete change of direction for fixed-income assets. This assessment of the reallocation of risk premia is valid for the next few years, in accordance with each asset class’s respective investment horizon, but it carries with it the risk of missing out on their performance potential.

We can now close the book on 2023 with a final end to the disastrous consequences of the Covid health crisis. Inflation is no longer the main cause for concern, central banks have been hands-on and effective, restoring a certain level of orthodoxy, and the markets have been efficient and have moved away from less credible actors (in this case, China). It now falls to investors to turn to diversification and uncorrelated performance drivers in order to generate returns that are in line with their expectations.

Strategy

Can the rallies continue?

2023 went out with a bang, with global bonds delivering nearly 10% total return and global equities earning investors almost 15% in November/December alone. As 2024 begins, the question facing investors is the following: Do the rallies still have steam?

While global equities are approaching historically high valuations, under the surface, we see that equally weighted US, Europe, Japan and emerging market equities are all trading near historic averages after having rebounded from near- cyclical lows in October 2023. This suggests that opportunities remain for those investors who can delve a bit deeper into regions and sectors within global equity markets in early 2024.

Equities will likely continue to enjoy a tailwind as central banks pivot to outright rate-cutting towards mid-2024. Indeed, falling bond yields (in anticipation of these cuts) and rising valuations have powered the equity rally so far.

The next step for equities will most probably be focused on an improving earnings picture in 2024. Indeed, as the earnings season is set to begin in late-January, the risk of disappointment – which was prevalent in 2023 – looks set to wane through 2024. For investors seeking some shelter from an uncertain cyclical earnings recovery, Japan (with accelerated buybacks and dividend payments) and India/Mexico (with re-shoring flows from China) look set to offer non-cyclical earnings growth in 2024.

For bond investors, while sovereign yields should remain stable (4–4.5% in the US and 2–2.5% in Germany) as disinflation continues in early 2024, the bulk of the long-dated yield declines are, we believe, probably behind us. With cash yields set to fall on both sides of the Atlantic in 2024, moderate-duration credit exposures should offer enhanced carry/ income for investors as the interest regime evolves through the year.

On balance, despite 2023’s strong close, investors should seek to stay engaged in both equity and bond markets, looking more granularly at credit exposure to enhance income, and into regions/sectors to maximise earnings growth prospects in the year ahead.

For more detailed insight, download the full UBP House View.