With inflationary fears beginning to ease, threats and opportunities abound in markets, though investors do indeed face considerable risk and volatility. However, it is important to ignore wider market distractions and remain focused on investing in the right asset classes and at the right time.
UK Inflation: is it Under Control?
After months of interest rate rises and concerted efforts by central banks to ease inflationary fears, the measures appear to be working. November saw US inflation levels cool to 3.2%, from a high of 9.1% in June last year with the UK market also showing promising decreases.
But while UK has seen the biggest drop in inflation figures since the early 1990s, the economic outlook remains uncertain. A recession is now confirmed, though how long it will last is another question.
In any case, we are not out of the woods just yet; inflation is still quite high, and energy prices are a significant factor to consider. As we navigate 2024, we may find the US economy remains resilient.
Multi-asset investors need to keep a tight focus on the assets most likely to generate strong returns. That means avoiding short-term noise and focusing on the bigger picture.
Why Bonds? Why Multi-Asset?
From an asset standpoint, the key question is: which way should investors turn next?
While 2023 was a less-than-stellar year for alternative investments such as renewable energy, we believe they remain broadly attractive. Revenues of many of the underlying companies in the alternative investment sector are index-linked so can offer some protection against inflation.
Across more mainstream asset classes, bond markets are also showing optimistic signs of real recovery following a challenging 2022. We think bond yields are looking increasingly attractive, both here and in the US, from the long end. After over a decade of relative real yields, investors are now getting true inflation protection from fixed income.
In equity markets, there remains strong pockets of opportunity. However, it could be argued much of their 2023 success was driven by large US technology companies, in particular the "Magnificent Seven", with a more mixed performance elsewhere.
In our view, the success of these top companies has tended to overshadow weakness among other companies and sectors. It has actually been quite a challenging 12 months for equity investors, although price/earnings ratios do look to be improving and the equity market picture remains balanced, as fiscal spending has remained supportive.
Key Elections Await
From a thematic standpoint, we see key potential drivers of change and opportunity for committed equity investors. They include the energy transition, technological shifts, the rise of state intervention and ageing populations. But there is also real reason for caution. Geopolitical factors could still spook investors and spark renewed market volatility.
The coming year will see general elections across several major economies – including the US – so political uncertainty over their outcomes could heighten investor nervousness.
While this may weigh on investor sentiment, it might pay not to focus too much on the headlines around this. We will hear a lot of noise but it is important to stay focused in order to pinpoint businesses that will continue to generate strong cash flows and investor returns.
Bhavin Shah is multi-asset portfolio manager at Newton Investment Management
