It’s easy to summarise 2023 as one of a shift to higher interest rates going head-to-head with inflation, particularly in Europe which narrowly avoided recession – at least so far. With 2024 well and truly upon us, we have an eye on the horizon to what may lay ahead for investors in the new year.
Interest rates will remain high whilst beginning to decrease – maybe Market experts and commentators widely share the expected view that central banks in London, Brussels, New York, Tokyo, etc… will maintain a strict tight policy towards interest rates to thwart inflationary pressures on the global economy.
Having said that, there are growing calls for central banks to lower the interest rates, as demonstrated on 1st February when the Bank of England released its latest announcement.
Although the decision was made to maintain the rate at 5.25%, for the first time since the 2020 Covid pandemic, one member of the Monetary Policy Committee voted for a cut – asking for rates to go down to 5%.
Two other policymakers favoured a rise to 5.5%, however the remaining six members voted to keep rates unchanged. Furthermore, Andrew Bailey remained firm in his stance in waiting for strong evidence that inflation was under control before amending the Bank’s policy.
Have you considered fixed-income products?
This is why we like fixed-income opportunities which can offer regular income whilst protecting investors’ core capital. We typically encourage clients to look into fixed-income products with a quarterly coupon payment, but with the flexibility to reinvest through each quarter. Often these can have a maturity of two to four years (i.e. the period where funds are invested) and paying regular coupon interest payments, and at the end of which, the principal is repaid to the investor.
Whilst nothing is guaranteed in money markets, we also like to look at fixed-income products paying a fixed yield on an invested sum over a fixed term. This means that the interest paid isn’t dependent upon policy interest rates set by central banks. For example, yields on government and money market bonds will ebb and flow with underlying interest rates set by the central banks.
As part of a diversified portfolio, including a portion of fixed and higher-yielding investment in a portfolio may provide secure and stable income over a fixed period. Furthermore, if reinvesting coupon payments build on the overall capital – typically a 12% annualised fixed-income bond can provide that platform for a diversified portfolio. When looking at the major forecasts for bond yields, the range for 2024 varies between 3.9 and 4.35% on the US 10-year Treasury Note, and in the UK, that yield forecast is lower at 3.5%.
Moving away from fixed-income products, another key feature in our predictions for 2024 is how well some specific stocks will continue to perform in the new year and furthermore, will drive up the market. Here, we are referring to tech giants.
Magnificent Seven tech stocks
Unless you’ve been living under a rock for the past 12 months, you’ve certainly heard of the ‘Magnificent Seven’, referring to seven technological giants in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
The term was first coined by Bank of America analyst Michael Hartnett in 2023, who used the ‘Magnificent Seven’ film name in 2023 when commenting on these seven firms. The performance of the Magnificent Seven stocks is driven by technological innovation, market dominance, financial performance, brand equity, research and development, and global economic conditions.
Features of the ‘Magnificent Seven’ performances in the market last year include:
The ‘Magnificent Seven’ stocks have collectively grown by over 116% since the S&P 500 latest low in October 2022 – related to the Fed’s focus on high interest rates to tackle inflation. This means that these tech giants massively outperformed the other 493 companies listed in the index.
Even more impressive, the ‘Magnificent Seven’ were responsible for 76% of the S&P
500’s 2023 gain of more than 20%.
These mega-cap stocks have played a major role in lifting the S&P 500 last year, even though it’s been a narrow market in terms of trading ranges, and most commentators expect this trend to carry on in 2024. As of writing, the index has surged by 21% over the past 12 months, going as far as reaching a new record closing high of 4,958.61 on 2nd February 2024.
One final note when reflecting upon investment choices in 2024: bear in mind megatrends.
Megatrends – investment strategy
Looking at megatrends – we identify five key ones which prevail – and should be carefully
considered and included in a diversified investment strategy:
- 1) Technological breakthrough. Disruptive innovations have become more accessible across the world thanks to globalisation and the ubiquity of technology. These breakthroughs result in a new set of challenges, however they also present crucial investment opportunities. Consider the advent of mRNA vaccines, e-commerce, solar panels, artificial intelligence, blockchain, cloud computing, streaming, smart grids and many other modern-day innovations. In each case, engineers and entrepreneurs are aiming to capitalise on the need for a new solution or a better alternative in existing markets.
- 2) Demographics and social change. The global population is getting older, and this is especially noticeable in the more advanced economies, such as Europe, the USA, Japan and China. As a result, the healthcare sector is likely to expand and continue to grow in these countries – think of healthcare infrastructure, but also technological innovations. This trend also fuels automation; and within it, a structural shifting in consumer spendings is expected to take place.
- 3) Emerging global wealth: In many countries around the world, we note an emergence of a massive middle class. This is the case for example in China as well as emerging markets. However, the Covid pandemic has demonstrated limits of global supply chains. Moving forward, these markets will be better available to businesses with a local presence.
- 4) Climate change and resource scarcity: The climate crisis more than ever illustrates the importance of investing in energy efficiency and renewable energy. Also, as consumers and businesses are becoming increasingly wary of the issue, climate tech is becoming more affordable as prices are dropping (ex. Wind turbines, solar panels etc)
- 5) Rapid urbanisation & the rise of megacities: Young and developing cities – especially in emerging markets – require increasing infrastructure and construction (i.e. hard commodities, diggers, concrete etc.). There are also investment opportunities as middle-class consumption increase in parallel: Consider housing, appliances, cars; demand for leisure and media as well as services (e.g. waste management).
As cities’ size and influence continues to increase, large-scale transport infrastructure, airports and bridges become essential. As electric vehicles become more prevalent, cities will need to invest in charging infrastructure and grids too. Smart cities that link up crucial infrastructure using high-speed connectivity may well become the norm in many economies.
With those consensus market forecasts as a current backdrop, we like to err on the side of caution and make sure that we’ve got portfolio recommendations that can underpin both sides of the coin – whether that be an inflationary environment or even a deflationary environment. Indeed, some market commentators have started to introduce deflation to the overall economic debating points for the new year as well as into 2025.
Whichever way 2024 pans out, we like to plan for the obvious and the less-so-obvious, so underpinning a portfolio with a sound income-generating element makes a lot of sense as far as we’re concerned.
