It has been an uncertain period for investors as rising inflation and the ensuing interest rate hikes by central banks shroud the future of markets in mystery.
However, top fund managers and expert market analysts have shared their views on what investors can expect in the year ahead, and how their portfolios can benefit.
After a torrid couple of years plagued by tightening monetary policy, some equity markets have jolted back to life in recent months.
Equities in the US have been the earliest beneficiaries of this renewed optimism, but these experts anticipate a wave of new opportunities for investors in the UK, Europe and emerging markets.
Aaron Barnfather, head of UK and European equity platform at Lazard Asset Management
“We can find a lot of value opportunities and the most interesting thing is that it is very widespread. A lot of environmental companies – be they asset owners or technology owners – have gone from being very expensive to very cheap very quickly.
“We really like German residential property and can buy that at 50% of their net asset value at the moment, which I think is remarkable. We can clearly see a set of growth companies in Europe would be at a very different valuation that if they were listed elsewhere in the world.”
Gervais Williams, head of equities at Premier Miton
“The great advantage of the UK market is that we have a lot of capital-intensive industries here. When the cost of capital keeps coming down, it gets more and more competitive in those markets, whereas if the cost of capital goes up, the UK market suddenly becomes more competitive.
“The UK is the best performing market bar none since September 2020 – though it has just been overtaken by the US in the last few days.
“In terms of the IPO market, the best performing part of the best performing market in the world is going to be small caps. We have too much bigness after globalisation – we need more smallness. The UK excels in quoted smallness.
“Capital intensive businesses are the area to go to, but what we have seen particularly in the last few years with indexation and mega caps is that smallness has become less and less valued relative to bigness. The valuation difference between big and small is crazy, so if you want to get properly small, get into the UK. The UK small-cap sector is just wonderful, and I am more bullish on it now than I have been for 30 years.”
Matthew Beesley, CEO of Jupiter Asset Management
“I find emerging markets really quite fascinating. They are not the homogeneous asset class they once were. Some of the structural growth drivers we all got very used to talking about regularly 10 years ago still persist, yet the discount for emerging market equities versus developed market equities is really quite large.
“It has been a rubbish asset class for multiple years now, and its non-homogenous nature has made it an area where you need to be quite careful where you’re investing. We are certainly seeing lots of clients come to us asking for emerging markets without China, worrying about it as a geography, both structurally and cyclically.
“But in many emerging geographies you are seeing the other side of that rate cycle coming to pass already, with rate cuts already happening in various parts of Latin America. I think emerging markets are going to find themselves on a different cycle, or certainly an accelerated cycle relative to developed markets. That plus the valuation discount will make emerging market equities very interesting next year.”
Interest rates have bolstered many bond yields to their highest levels in years, but cuts in the future could see those fall.
However, these experts still see attractive long-term opportunities for investors in the fixed income space, particularly in green bonds, investment grade bonds and AT1s.
Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management
“We put the price tag of the investment needed to decarbonise 75% of the global economy at $3.1trn a year – that is a colossal amount that is going to need financing. Green bonds are going to be a key source of that financing and it is a part of the market which is no longer niche. It is a €2trn asset class that it going to grow by a further €600bn next year.
“Green bonds take you towards your investment goals while minimising the environmental impact, but you need to have astute buying selection. You need to not only analyse the conventional risk and return characteristics that you would normally, but also the use of proceeds.
“Is that bond indeed financing that green building, bolstering resilience to physical climate risks and improving energy efficiency? Whatever it might be, you have to be active in the green bond market.”
April LaRusse, head of investment specialists at Insight Investment
“You probably want some duration in your bond fund. If you want to allocate to fixed income, we prefer investment grade because if economies are slowing down, they will be more resilient and have interest rates risk built in. That would be the natural place to start.
“However, there is probably going to be a lot of volatility because of the environment macro-wise. There will be some bumps, so be wary.
“Although 2024 looks much more promising for equity markets – certainly for fixed income markets – we are very aware that you could have buying opportunities in fixed income. It is a good moment to allocate, but know that if everything was clear and without risk, you wouldn’t get any yield. Now is the time to be bold but also accept that there is still some volatility.”
Bruno Duarte, financial credit manager at Algebris
“In this fight for duration, spike in inflation and rally in interest rates, everyone parked their savings in money market funds over the past 12 to 18 months because they were paying 5-6% yields. You are probably not going to be enjoying that for very much longer – you need to find an alternative.
“If you are comfortable in deeply subordinated parts of the cap stack, then we think AT1s are probably the best investment out there across the entire fixed income world. It is nothing like high yield. What you get is double the spread that you really should and the average AT1 is yielding 8% to 9%. And you don’t have to go off piste to find them – you can stick to national champions. When we look at AT1s today, the fundamentals have never been better.”
After a prolonged period of uncertainty, investors have become more confident in the future of markets in recent month by putting their money back into markets.
Nevertheless, concerns still remain for these experts, who warned investors to be cautious of credit and loan markets, as well as the long-term economic future of the UK.
Vivek Paul, global head of portfolio research at BlackRock
“I would be worried about some elements of public credit and investment grade credit given where spreads are and the asymmetries around that. In terms of the other side, for those investors who can operate in this space, I would also highlight private credit exposures.
“We think there is a structural shift in the market – the future of finance is evolving. It is not without risk, but I think spread levels and the structural opportunities there might be attractive.”
Oliver Blackbourne, multi-asset manager at Janus Henderson
“The tailwind for the loans asset class is running out. There is more credit risk there and you are going to lose the tailwind you have had from rising interest rates. The delayed defaults will also become an increasing issue there, so that is one that we are worried about.
“On the flip side, we are finding really good value in real assets. If you are looking at renewables, infrastructure and specialist pots of property, there are some big discounts there that have some very solid underlying cashflows, whether you are looking for inflation-adjusted assets or government-backed cashflows.”
Seema Shah, chief global strategist at Principal Asset Management
“I agree about the loans, but on the positive side, I would be investing in US small-cap equities. I think it is going to have a tough first part of the year as you get a bit of a slowdown, but valuations are amazingly attractive and if you are willing to sit through some of that volatility, I think the second half of the year is going to be very strong.
“The UK has certainly been more resilient than I anticipated, just as you have seen in many countries around the world. But the concerns I have for the UK are not necessarily cyclical. There are going to pass through from the rate hiking cycle, but from a strategic perspective, I do have concerns about the UK’s long-term productivity growth.
“Political instability is never something that international investors want to get involved in – that I think is key. But there is another issue around labour supply. We have had a huge amount of immigration in the last couple of years, but the people who can actually join the labour supply as working individuals is relatively limited to what you have seen previously.
“If that were to persist then you are looking at a tighter labour supply, which would suggest higher structural inflation pressures. What is the long-term investment perspective for a country that has a higher cost of capital and not much political stability?”