By Richard Flax, Chief Investment Officer at Moneyfarm
What are the key themes our Asset Allocation Team has in focus for 2024? Watch as our Chief Investment Officer, Richard Flax, shares his thoughts on the current investment environment, including the challenges and opportunities presented by the market this year, with his yearly market outlook.
“2023 was yet another year to remind us of the dangers of trying to forecast financial markets too precisely. The consensus, according to one Bloomberg commentator, for the year was that US equities would suffer, Chinese equities would outperform and bonds would rally. The reality, as it turned out, proved rather different.
With that in mind, let’s turn to 2024 and think about what the key issues might be and how they might play out.
First, in terms of the global economy, the outlook for growth remains a key concern. Europe is stagnating, while the US has proven surprisingly resilient. Will growth slow further, or will we really see a ‘no-landing’ scenario in the US? Our starting view is that growth will slow from here on – in both Europe and the US – and that the strong results we saw from the US in the second half of 2023 will prove transitory, even if we’re not expecting to see a recession in 2024.
Second, monetary policy is expected to remain as important for financial markets in 2024 as it did in 2023. Financial markets have priced in fairly significant cuts to policy rates over the year. We think that the direction of travel is right, given our outlook for growth, but maybe not to the extent implied by markets today. It is interesting that the Central Bank facing the strongest growth (the Federal Reserve) has been the most forthright in signalling lower rates in 2024. The ECB and the Bank of England have been more circumspect, despite facing weaker economic activity and, at least in the case of the ECB, lower inflation.
Third, let’s turn to inflation. We think there are two key issues here. The first is on the current trajectory, which does show inflation in the US, UK, and Eurozone converging towards their target. But we think that life will get harder for policymakers as they try to coax inflation back towards 2%. The last mile could be the hardest. The second issue is – how will prices respond to the expected loosening of monetary policy? After all, labour markets remain pretty tight and employers are still finding it tough to hire workers in some industries (although it has improved). We think that the rate cutting cycle, when it comes, could prove quite short-lived and that the neutral policy rate will be higher than we’ve seen in the past decade.
Fourth, we should consider equity valuations. Here the picture is a familiar one. US equity valuations trade at a meaningful premium to their global peers. US equities re-rated following a strong performance last year, and now look a little more highly rated than their 10-year average. In contrast, non-US equities continue to look relatively attractive versus history. In a world of slower growth, the tech-heavy US equity market may continue to attract capital, but if Central Banks do begin to ease, then the prospect of lower rates and faster global growth could prompt non-US equities to outperform.
Finally, there’s the issue of ‘geopolitical risk’. The question here isn’t so much whether there’s geopolitical risk in the world – there unquestionably is – but whether or not those risks will become relevant for financial markets. The list of candidates is pretty long – Russia -Ukraine, US-China, and the Middle East are all potential candidates to impact financial markets. Most recently, we are seeing renewed supply chain pressures from the conflict in the Middle East that could potentially begin to feed into inflation. Along with that, we should add the prospect of a very noisy US electoral cycle ahead of the Presidential elections in November 2024. As we’ve noted before, financial markets have largely looked past many of these risks in recent years, but we still see potential for geopolitics to add to market volatility in 2024.
Even as we think about the key market drivers for 2024, we should remember not to get too bogged down in focusing on the next twelve months. Investing is a long-term game, and, as was the case last year, we think that the long-term outlook for financial market returns has improved, based on our annual Strategic Asset Allocation process. Bond yields are higher than they have been, even after their recent rally, and equity valuations, particularly outside the US, look quite attractive. Starting valuations might not be a great predictor of short-term returns, but they are a key driver for the long term.”
The views expressed here should not be taken as a recommendation, advice or forecast. Projections are never a perfect predictor of future performance, and are intended as an aid to decision-making, not as a guarantee.
As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. If you are unsure investing is the right choice for you, please seek financial advice.
Richard Flax: Richard is the Chief Investment Officer at Moneyfarm. He joined the company in 2016. He is responsible for all aspects of portfolio management and portfolio construction. Prior to joining Moneyfarm, Richard worked in London as an equity analyst and portfolio manager at PIMCO and Goldman Sachs Asset Management, and as a fixed-income analyst at Fleming Asset Management. Richard began his career in finance in the mid-1990s in the global economics team at Morgan Stanley in New York. He has a BA from Cambridge University in History, an MA from Johns Hopkins University in International Relations and Economics, and an MBA from Columbia University Graduate School of Business. He is a CFA charterholder.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
