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A late rally brought some respectability to stock market returns last year. But geopolitical and macroeconomic uncertainty threaten to hamper the performance of portfolios in 2024.
We’ve put 10 topics under the microscope so that you can judge what investment strategy to adopt in the coming months.
1 – Investing when interest rates are falling
The last two years have seen the most aggressive cycle of interest rate hikes in history. But if, as many assume, rates are likely to fall in the coming months, what are the implications for investors?
Lindsay James, investment strategist at Quilter Investors, says: “History tells us that market performance is often strongest in the early part of the rate-cutting cycle, so investors will need to make sure they are ready to participate in any market rally.”
Lower rates can affect companies in different ways. The technology sector, for example, could benefit from a fall in borrowing costs because high rates hurt the value of the assumed future earnings of these ‘growth’ companies.
Falling interest rates could also favour housebuilders. In 2023, increased borrowing costs hiked mortgage repayments, resulting in a downturn for the property market.
In contrast, banks could suffer because they perform better when rates are high, allowing them to increase the margin between what they charge borrowers and what they pay depositors.
2 – High inflation investment options
The UK’s annual inflation rate nudged up to 4% in December 2023, reversing the year’s broadly downwards trend and reducing the likelihood of an immediate reduction in borrowing costs.
Quilter Investors’ Lindsay James says: “The inflation beast may not yet have been slayed, but it has certainly been tamed. Prices rises will continue to soften but may not reach the golden 2% [official] target this year.”
When inflation is high, some companies can appeal more to investors than others. Jason Hollands, managing director at Bestinvest, says: “Choose businesses that are able to pass on inflationary cost increases to customers without sacrificing their margins and which are not vulnerable to being undercut on price.
“Companies with unique intellectual property rights and high recurring contractual income fit the bill.”
3 – Investing in a recession
The UK economy grew by slightly more than expected in November last year but still remains at risk of slipping into a mild recession (back-to-back quarters of negative economic growth).
Even in a recession, investors have options to help insulate their portfolios. Diversifying across a range of assets such as equities, bonds, property and cash, as well as different equity sectors, helps to smooth out returns if a particular asset class or sector underperforms.
Businesses in so-called ‘defensive’ sectors, including consumer staples such as food, drink, personal care products, utilities, and financial services, tend to be less vulnerable to falling demand during a recession.
More resilient parts of the market also include ‘non-cyclical’ businesses, such as defence and healthcare, that tend to benefit from government spending.
4 – Taking advantage of green issues
There was a surge in the popularity of investments with strong sustainability credentials during the pandemic, but many of those funds fell out of favour and the gains they enjoyed between 2020 and 2022 tended to unravel last year.
However, Rob Burgeman, senior investment manager at RBC Brewin Dolphin, believes a revival could now be underway: “The drivers behind these investments are still there and the Schroder Global Energy Transition Fund could be one way of playing this theme in 2024.
“It has a good geographical spread and invests in a variety of companies related to the energy transition, ranging from renewable technology to electric vehicles and chemicals.
“Another option is JLEN Environmental Assets Group, which is a FTSE 250-listed investment trust focused on environmental infrastructure. Its portfolio includes a range of assets you’d typically expect, such as wind and solar electricity generation infrastructure, but it also includes waste and wastewater processing, anaerobic digestion, and battery storage facilities.”
5 – US election’s impact on investment
AJ Bell’s Russ Mould says: “A study of post-1945 ballots shows that the US stock market traditionally gets a mild attack of the nerves in the final year of a presidency, as it is the weakest year on average using the Dow Jones Industrials stock index as a benchmark.
“That said, the final year of a Democratic presidency has on average yielded a double-digit percentage capital return.”
One of the options available to investors keen to gain exposure to a range of US stock market indices is via relatively low-cost index funds. Read more about them here.
Bestinvest’s Jason Hollands says: “A second Trump administration would be quite consequential, with a potential extension of tax cuts, implemented during his first term in office and which are due to expire in 2025, a possible return to trade wars, and the dismantling of much of the current administration’s green agenda.”
6 – UK election’s impact on investment
An election looms in the UK, most likely in late autumn or early winter this year. AJ Bell has analysed the statistics for UK general elections since 1962 and found that, in the 12 months following general elections that led to a change of government, the FTSE All Share Index increased by an average of 12.8%.
In contrast, when the incumbent governing party held on to power, the index returned an average of just 0.9%.
The figures also suggested that the market performs better across a whole term where a new government is elected. The average return over the whole term for a newly installed government was 47.9%, compared with 30% for a returning party.
One of the options available to investors keen to gain exposure to a range of UK stock market indices is via relatively low-cost index funds. Read more about them here.
7 – Technology companies as an investment option
Artificial intelligence was investors’ favourite theme of 2023, with a handful of mega technology stocks – the ‘Magnificent Seven’ – playing a big part in the AI narrative (through applications, internet, software, semiconductor chips) and seeing their share prices climb as a result.
RBC Brewin Dolphin’s Rob Burgeman says investors who want exposure to the tech sector, but are looking to spread their holdings a little wider, could consider a handful of specialist funds: “Polar Capital Technology Trust is one way of getting exposure to the sector on a global scale.
“The trust includes the big US players among its holdings, including Apple, Microsoft, and Meta, but also offers exposure to smaller tech and companies from other parts of the world, such as Taiwan Semiconductor Manufacturing Company.
“Alternatives could be the likes of Allianz Technology Trust and Blackrock’s Next Generation Technology Fund. The former includes many of the same names as the Polar Capital trust, while the latter has Nvidia and Tesla among its top holdings alongside a number of less familiar names such as Lattice Semiconductor.”
8 – Investing in Japan
After years of underperformance, Japan and the Tokyo stock market was a good place for investors in 2023 and the signs are that the momentum could continue this year.
Not only do Japanese companies sit on an estimated £700 billion in cash, which could potentially be returned to shareholders or recycled back into their businesses, but Japanese regulators have introduced corporate governance reforms. These should reduce concerns that overseas investors have about putting money into a foreign jurisdiction whose business ways and culture can be difficult to understand.
Hiroyuki Ueno, chief strategist at Sumitomo Mitsui Trust Asset Management, says: “The Japanese stock market in 2024 should be robust, supported by economic growth underpinned by mild inflation and measures to improve capital efficiency implemented by the government and the stock exchange.”
9 – Investing in emerging markets
Emerging markets are countries that are on the way to gaining a more significant foothold within the global economy.
According to the Franklin Templeton Emerging Markets Equity team, the outlook for this sector looks encouraging in 2024: “We remain positive on emerging market equities. Drivers include the likelihood that US interest rates have peaked, a recovery in earnings growth, and the economic outlook in China, which appears to be past the worst.”
Franklin Templeton points to reforms that “have enabled India and Mexico to attract foreign investment and raise capital expenditure” while “equities in South Korea and Taiwan appear likely to recover from an improving technology cycle. This will help earnings, with the two countries expected to drive earnings growth in emerging markets this year.”
10 – Investing in an era of geopolitical unrest
Russia’s invasion of Ukraine and tensions in the Middle East, plus the great power rivalry between the US and China, have catapulted investors into a new reality of geopolitical risk.
One tool in the armoury of investors looking to counter geopolitical volatility is diversification. Diversification is an investment strategy that is used to manage risk and smooth returns. It involves spreading investments across various asset classes, as well as different sectors and geographic regions.
Find out more here about the investing equivalent of not putting all your eggs in one basket.
