From volatility comes market opportunity

Geopolitics, ‘the election year’, artificial intelligence and growing fiscal concerns mean volatility is a given this year.

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However, volatility provides opportunity and in 2024 we expect tactical positioning to play an increasingly important role across investment portfolios.

"Where a backdrop of higher rates typically leads to recession and a collapse in asset prices, so far, economies and markets have shrugged these off thanks to fiscal expansion that has supported households and corporates.”

Last year saw equity markets register impressive gains and fixed income markets stagger through significant volatility to provide investors with solid returns.

In fact, the past year might be best described as an ‘everything rally’ — nearly every asset class registered positive gains. Remarkable, given the banking crises, twin wars and further central bank tightening.

Where a backdrop of higher rates typically leads to recession and a collapse in asset prices, so far, economies and markets have shrugged these off thanks to fiscal expansion that has supported households and corporates.

Four key topics

In this year’s Global Market Outlook, we highlight four key topics we are watching in 2024 and how these relate to our investment perspectives — the US consumer, rising credit risks, geopolitics in an election year and the compelling opportunities across fixed income markets.

Alongside further advancements in AI, including a more rapid commercialisation of its potential — that may help offset some of the demographic headwinds we have previously spoken of — these are some of the headlines we expect to drive market direction in the year ahead.

Election year

In 2024, more than half of humanity will reside in countries holding a nationwide election. We expect geopolitics to again figure prominently and be a continued source of volatility for markets, an ongoing threat to supply-chains and an inflation risk. Not least, as America gears up for its presidential election and countries seek to test its resolve as the world superpower.

Indeed, as we highlighted last year, 2024 may prove to be a microcosm of the challenges investors face in the decade ahead — as changing demographics, rising populism and a shift to a multipolar world provide a more volatile backdrop for markets.

The US consumer

This year, the strength of the US consumer who has ably supported corporate profits in recent years, is likely to weaken. Alongside benign global growth, analyst expectations for double-digit earnings per share growth currently appear stretched.

And while central banks and governments have shown a willingness to intervene if financial conditions deteriorate rapidly, we cannot rule out a market dislocation should they fail to act in an appropriate timeframe.

While we see scope for equities to rise further, given the magnitude of challenges facing markets a lot will need to go right for this to occur. Following strong gains last year, we believe this probability remains low relative to the potential upside. Irrespective, market performance across regions and sectors is likely to be uneven throughout.

Perhaps more so than previously, we believe tactical positioning could play a more important role in managing client capital.

One key aspect may be where and when to position for any global easing cycle — emerging markets, cyclicals, real estate, small caps and the value sector could be among the beneficiaries. While we see the potential for mid-single digit upside across equity markets, there remains the possibility of greater downside too.

Credit risks

Balancing this possibility of equity gains against the potential for risk-adjusted returns from fixed income informs our positioning as we start the year.

We have a preference for high quality fixed income assets, including Australian and global sovereign bonds and investment grade credit. While we don’t forecast a sharp fall in yields this year, as the starting point for rate cuts becomes clearer, we believe the US yield curve is likely to bull steepen.

Alongside the current yield embedded in these assets, bonds should provide an opportunity to deliver solid risk-adjusted returns to investors.

Conversely, we start the year with an underweight to high-yield credit. Here, spreads remain tight and inconsistent with the prevailing recession risks.

Fixed income

If the economic downturn becomes more severe and central banks are forced to cut rates more aggressively, high-quality fixed income may offer outsized returns to equities and solid diversification to portfolios.

Across equities, we are modestly underweight overall, with a preference for developed markets — in particular European shares. In Europe, valuations are attractive, profit growth is likely to match the US and an easing cycle should commence earlier.

This theme of investing in previously underperforming and cheaper segments of the market is likely to be a feature of portfolios — providing the opportunity to participate in rallies while limiting the downside in the event of a broader market pullback.

Although we currently hold a modest underweight to Australian and emerging market equities, given recent underperformance and relatively cheap valuations, we look for opportunities to increase our positioning over the year. 

Of course, valuations and past performance will not dictate positioning entirely. In the US, the so-called ‘Magnificent Seven’ are expected to drive EPS growth. If a broader market pullback eventuates, we may use this as an opportunity to increase exposure to higher beta segments such as this.

Delicately poised

For investors, 2024 appears delicately poised. A soft landing may allow equities to continue climbing, a misstep from the US Federal Reserve could prove otherwise.

As always, we advocate a long-term diversified investment strategy. And while we commence the year positioned defensively overall, we will seek to exploit opportunities as we navigate what is likely to be another volatile year for markets.

Click here to read the full 2024 Outlook report.

Lakshman Anantakrishnan is the Chief Investment Officer at ANZ Private.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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