For investors in 2024: Elections, focus on real returns, tech disruption and sustainability

BY THE time kids head back to school in January, many of us may have to revisit some subjects from our own curriculum.

The economics of the past decade, with ultra-loose monetary policy, is not a standard play book for the decade ahead. The year 2024 will go down as the “year of elections”. Meanwhile, the pursuit of science to address climate change and the engineering marvel of generative artificial intelligence (AI) will be unrelenting in changing our lives forever.

Next year will be a pivotal one, catapulting the world into a new era as countries readjust to a web of economic drivers, multipolar politics and refashioned supply chains.

This year, US growth has been resilient despite the Federal Reserve lifting interest rates to curb inflation. Large budget deficits, tight labour markets and excess savings from the pandemic have driven economic activity. These trends may reverse in 2024 as unemployment, lower fiscal stimulus and falling savings lead to a slowing US economy.

With our forecast of a mild US recession and core inflation falling below 3 per cent, we think the Fed will cut rates each quarter from June 2024 – with cuts of 25 basis points each in June, September and December – to avoid a further slowdown.

Apart from this mild recession scenario – to which we ascribe a 50 per cent chance – we factor in a 30 per cent probability of a “soft landing” scenario, where a US recession is averted but growth continues to weaken and core inflation eases below 3 per cent. The Fed’s rate cuts may be less pronounced and delayed in this case.

Hence, we take a more sanguine view on risk within investment portfolios at the end of the rate-hike cycle, and advocate for investors to adjust portfolios strategically in preparation for 2024.

We upgraded our overall risk stance in our tactical asset allocation from “underweight” to “modestly overweight” this month.

In fixed income, we upgraded our underweight position in developed market high-yield bonds to neutral, and favour duration – the long end of the curve (eight to 15 years). In equities, we move from underweight to a modest overweight, with a shift in allocation to European equities from underweight to neutral. We remain neutral on US and Asia ex-Japan stocks and continue to favour Japanese equities.

Even though the increased allocation to cash deposits – a stable source of yield in the midst of volatility – served investors well in 2023, this is an opportune time to access a wider source of yield. As the interest-rate outlook stabilises, investors can build a diversified portfolio of income-yielding assets including stocks, bonds and private credit. Identifying quality stocks and bonds linked to companies with favourable fundamentals is also back in focus for alpha generation.

2024: the year of elections

Almost 40 per cent of the world’s population will head to national polls next year, in over 40 countries that represent more than 40 per cent of global GDP. November’s US presidential election will take centre stage, with implications across geopolitics, economics and business.

Public policies could also impact specific sectors. Historically, the biotech, industrial, and healthcare sectors tend to be favoured under the Democrats, while pharmaceuticals and airlines tend to outperform when Republicans are elected.

How the US navigates its contentious relationship with China will also be a prominent foreign policy topic in the upcoming election. Volatility will likely escalate in the run-up to the election, though history has shown that the stock market tends to refocus on fundamentals once uncertainty fades.

Focus on real returns

Inflation appears to be on track in moving towards central banks’ 2 per cent targets by 2025. This comes after the Fed and European Central Bank’s (ECB) aggressive rate-hike cycle over the past two years to bring the Fed funds rate to between 5.25 and 5.5 per cent, and ECB deposit rates to 4 per cent, to combat inflation.

With inflation under control and growth at risk, we expect the Fed and ECB to start cutting interest rates from June 2024 to the benefit of risk assets. Investors should focus on investments with real, or inflation-adjusted, returns and on companies with resilient business models and margins. Quality companies with strong balance sheets, cash-generating capabilities, low levels of net debt and resilience against tighter financial conditions remain our focus.

Fast forward to the future

Technological disruption is creating compelling opportunities for investors looking for longer-term growth drivers. As generative AI moves from training to inference hardware, we see a proliferation of AI applications that can drive productivity, enhance creative content production and radically transform customer experiences.

Selected Chinese Internet and platform companies that demonstrate operating resilience may benefit from the broad recovery of China’s economy, as well as the wider adoption of AI and the consumption of digital services.

As data is the foundation of these new business models, cloud computing, big data and cybersecurity companies are important enablers. Demographic trends of ageing populations, higher wages and tight labour markets also favour technology substitution from human labour.

Harnessing sustainability

At the COP28 climate summit last week, around 110 countries pledged to treble renewable energy capacity by 2030. Global government support, higher power prices, better efficiency and volatility in energy markets all play into the adoption of clean energy. Despite short-term challenges for energy transition stocks, the long-term structural story for green mobility, renewables and smart grids remains compelling.

Companies in the food value chain are also in focus, as food production accounts for around 35 per cent of total greenhouse gas emissions. Climate change has impacted food system resilience, raised food prices and reduced availability.

What this means for investors

• Build diversified portfolios with wider sources of income and growth. As interest rates stabilise and potentially drop, risk assets including bonds, stocks and real assets may perform well. We favour quality growth sectors, including technology, and defensive value sectors, including healthcare, consumer staples, and utilities. We urge investors to focus on real (or inflation-adjusted) returns and be selective on companies’ resilience to tougher economic conditions and climate-related challenges.
• Safe-haven assets. Assets such as gold are suitable during periods of uncertainty. We favour gold as the Fed rate-hike cycle nears an end, resulting in US real yields retreating. The Japanese yen will outperform in 2024 as we expect the Bank of Japan to normalise monetary policy.
• Alternatives exposure. Alternatives in a diversified portfolio can help investors navigate an uncertain environment. Selective opportunities exist in private credit, infrastructure, private equity and secondaries.

The writer is chief investment officer and head of portfolio management and research office, Bank of Singapore