Optimism in 2024, diversification is key

We enter 2024 with a sense of optimism.

Risk assets performed well in December, continuing the strong momentum that emerged near the end of October. Robust economic growth in the US and a continued decline in inflation last quarter have helped the markets stay afloat. As we enter 2024, we see positive earnings momentum and attractive valuations; while volatility may arise from the continued geographical tensions and multiple key elections, we are cautiously optimistic about opportunities for sustained growth into 2024.

SJP Market Outlook

SJP published its Market Outlook last week – you can find it here. 

Economically, strong labour conditions and consumer spending confidence may result in a later rate cut to what the market has priced in. Credit conditions are still tightening at a pace consistent with recession, and the US may even enter a technical recession – but “muddling through” with some growth is still our base case. We note the political and geopolitical conditions with many of the key economies entering elections in 2024, which may alter the global supply chains contributing to market volatility.

We see much value and opportunities in Emerging Markets (EM) – MSCI EM is currently at a discount of 32% compared to MSCI World. We continue to see an attractive risk-reward ratio in quality credit, with interesting yields and likely less volatility than equities¹.

The Diversification Dilemma

Our economic scenarios paint a picture of uncertainty – this is often the case with projections, which tend to be shorter-term and thus almost always unpredictable.

I look back to this time last year. While the dispersion of 12-month projections was just as wide and uncertain, the closest to “consensus” was a certain US recession, rate cuts, and single-digit stock market growth. Talking of growth, well, no one really wanted to, given what a terrible year growth stocks have had in 2022.

Yet in 2023, we had a rather resilient US economy, successive rate hikes, and significant outperformance from growth stocks, led by the Magnificent Seven, particularly in the first half of the year.

The overwhelming dominance of the Magnificent Seven was perhaps the defining surprise of 2023. The group (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla, and META) achieved a staggering 100% return over the year, overshadowing performance from most other companies and portfolios. Yet the same group lost its entire December gains over just the first two trading days of the year – highlighting the risk of concentration. History shows that periods of extreme performance often do not persist. There always tends to be some gravitational pull back down towards more normal conditions. We call this “mean reversion”.

Meanwhile, following the historical losses from traditional portfolios in 2022, many put their hard-earned cash into cash or cash-equivalents – particularly Money Market Funds (“MMF”s). It is reported that there was aUS1.4 trillion flow into MMFs over 2023² – to put it into perspective, the average full-year net inflow for 2012-2022 was at just $179bn³. However, MMFs are not completely risk-free – they typically invest in a mix of short-term (1-9 month) papers from those issued by government, banks and corporations. And they carry default risks as well as “run” (as in run on the bank) risks.

The biggest challenge for investors in 2024 will be to understand the amount of risk they are taking or not taking. Putting all your eggs into a few outperforming stocks or into an asset class that is seemingly safe are both not the best-advised course of action. As Warren Buffet famously said - “be fearful when others are greedy and be greedy only when others are fearful.”

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

¹ MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

² BofA Global Investment Strategy, EPFR, 2023

³ EPFR, 2023