2023 – still learning
The last two years have not been easy, at least in the short run. 2022 was a tough year for investors, with shares and bonds both falling as investors started to price in the impact of an unprecedented interest rate tightening cycle. Then many people, myself included, positioned themselves at the start of 2023 for recession and an easing of monetary policy, neither of which materialised.
In fact, the economy held up much better than expected last year, inflation was slow to fall, although it did more rapidly in recent months, and interest rates stayed higher for longer. A narrow segment of the stock market performed well (big growth stocks) but the rest of the market lagged. The bond rally that I expected on the back of falling interest rates was postponed.
With the benefit of hindsight, the Dodge & Cox Worldwide Global Stock Fund was too defensive a choice for global equity exposure, although it performed reasonably well. The Pyrford Global Total Return Fund was also too cautious a choice and the Colchester Global Bond Fund only came good towards the end of the year. I was also too early into the high-octane recommendation of the Edinburgh Worldwide Investment Trust. It has risen by more than 20% since October but remains underwater for the year as a whole.
What next?
So, as we enter 2024, my base case is that the economic scenario I expected a year ago could arrive 12 months late. The lag between the implementation of tighter interest rate policy and its impact on the economy is variable and seems to have been prolonged this time around. Economies are arguably less exposed to rising interest rates because of the greater prevalence of fixed rate mortgages. Higher levels of savings during the pandemic may also have provided a cushion for many people in the years since. It feels, however, that a downturn, even if a mild one, is on its way.
Inflation is now falling more rapidly, and the case for maintaining high interest rates is weaker. The peak in rates looks to have been reached and the falls which were expected last year should happen in 2024, although I would expect rates to remain reasonably high through the first half of the year. Central banks will be wary of undoing their hard work by easing too quickly.
At the same time, the rally in the final two months of 2023 has already captured some of the benefit of easier policy. Bond yields have already fallen some way from their peak and the valuation of shares has risen. Markets have done their job of anticipating the future.
This is the backdrop to my fund picks for 2024. A difficult economic environment with more supportive interest rates and valuations that are not stretched but are by no means cheap. My picks are defensive, aim to capture the high income now available across many asset classes, but also allow for the possibility that markets rally quite hard as policy eases. I hope I have covered all the bases.
The first pick is the Fidelity Cash Fund. This is a very conservatively managed fund, with a focus on safety, liquidity and diversification, designed to deliver consistent returns. The distribution yield is currently just above 5%. Investors benefit from Fidelity’s long experience in managing money market investment strategies and from a robust credit research process. The purpose of this pick is to capture what might be the final few months in which investors can enjoy high income with negligible risk to their capital.
Moving up the risk scale, and with a view to capturing both relatively high income with the added kicker of a capital gain as interest rates start to fall this year, the M&G Global Macro Bond Fund is the second pick for 2024. This is a flexible fund that can invest across multiple regions and lend to a range of borrowers. This broad remit means that investment experience is vital and the manager, Jim Leaviss, is one of the most experienced at M&G. He is supported by an experienced analyst team.
The third pick this year is the first of two global equity funds. The Fidelity Global Dividend Fund is one of Fidelity’s most consistent performers and should provide a good balance of growth and income. It is a fund that I have held in my portfolio for many years. Dan Roberts is a meticulous investor, with long experience, and he is supported by an extensive team of analysts. As interest rates fall, I expect the reliable yield offered by a global equity income portfolio to become increasingly attractive to investors.
The final pick is simplicity itself. The L&G Global Equity Index Fund benefits from Legal & General’s strong index-tracking capability and is a low-cost option for investors looking for a plain vanilla exposure to global equities with a long-term horizon.
As always, I will invest in all four of these funds myself.
