2024 is expected to be a pivotal and important year for the global economy.
A recent report by Wells Fargo Bank revealed the top 5 “ideas” for clients’ investment portfolios in 2024, as the bank expects 2024 to be a pivotal year for the global economy and capital markets.
According to the report, which was reviewed by Al Arabiya Business, the bank estimates that there are potential opportunities during 2024 for money to return to many markets and regions. Disruptions are still possible, but the bank maintains its expectations of improved opportunities in the long term. “Patience remains the best tool for investors.”
“Defensive” position
As 2024 begins, the bank still prefers more defensive positions among asset groups. In general, it prefers fixed income compared to stocks, especially with yields rising to their highest levels in several years. Additionally, he has increased the weight of real assets, an asset class that tends to perform well in inflationary environments, in the investment portfolio since early 2020.
“We favor rebalancing because it provides a tool to help manage portfolio risk and seek higher returns over time. The first step is to reduce holdings that have become expensive and are at risk of losing value.
After taking profits on these assets, preferred tactical options provide potential targets for reinvesting the proceeds for long-term value. He believes industrials, materials, and healthcare are sectors that appear to be reasonably priced today and should help drive the economy forward.
Riskier Equity Categories
Looking ahead, the bank expects the economic slowdown to impact equity markets, potentially allowing for a shift toward investments that it believes will most likely benefit from the subsequent recovery. These assets tend to be more cyclical, such as small-cap and emerging market equities, as well as high-yield debt. The equity sector is likely to follow suit, shifting risk toward more cyclical and growth sectors such as financials, consumer discretionary, and energy.
The economic cycle itself can boost the performance of growth stocks. During a downturn, investors generally favor large-cap growth companies with strong fundamentals and balance sheets, as they are generally better equipped to withstand an economic slowdown. Conversely, as the economy exits its downturn and begins to recover, small-cap companies tend to outperform in anticipation of a broad-based earnings rebound. Similarly, early in a global economic recovery, international currencies tend to appreciate against the dollar, a trend that boosts returns for dollar-denominated investors.
Attractive returns from long-term bonds
One of the primary reasons to hold fixed-income assets in a diversified portfolio is their historical ability to mitigate risk in equity markets while contributing income. In addition, the recent rise in yields opens up other potential advantages.
The yield on the 10-year U.S. Treasury note excluding core inflation (as measured by the Consumer Price Index excluding food and energy) turned positive in September 2023, and the bank believes investors now have the opportunity to achieve the highest returns in decades.
As long as the bonds are from a high-quality issuer, investors can secure a known yield to maturity with limited default risk.
Many long-term investors, concerned about short-term volatility in equity prices linked to the state of the economy, have noted that cash and CD rates are the most attractive alternatives in decades. But if inflation and short-term interest rates decline next year, as the bank expects, it will likely be difficult to renew that rate at today’s high rates.
Alternative Investments
Increases in correlations between asset classes can occur when the same factors affect multiple asset classes. This has happened several times over the past few years, as inflation and higher rates imposed by the Federal Reserve to combat inflation have simultaneously affected equity and fixed income prices.
This is a challenging environment for investors in these two traditional asset classes, as history suggests that their portfolios may temporarily provide limited protection from falling prices until the benefits of long-term diversification reassert themselves. One way to gain additional diversification is for qualified investors to add exposure to alternative investments that not only offer the potential to boost returns but can also help diversify a variety of risks, including market and inflation risks.
The bank believes that the macroeconomic strategy could provide low correlations to global risk assets, including stocks and bonds, in 2024.
Commodity Prices
Supply constraints and demand growth have traditionally been the main drivers of supercycles. Both dynamics are expected to continue for the foreseeable future, supporting commodity prices as demand picks up and structural supply is undersupplied for many. The potential diversification benefits of commodities make them attractive for both tactical and strategic investment timeframes.
While performance may be moderate as a weak economy dampens demand in cyclical sectors, after three years of the current super-cycle, Wells Fargo sees further upside potential ahead.
Any pullback in commodity prices at this stage of the cycle could provide opportunities for investors to increase exposure to the asset class at a reasonable cost. The positive outlook for performance not only makes the asset class attractive, but it also ties in well with the bank’s view on equity sectors.
Given the economic reacceleration, the bank expects strong performance in materials and industrials as the US and China build their own infrastructure over the next decade. In commodities, we remind investors to diversify and not focus on one category or subcategory, including gold.