How confident are our Elite Rated multi-asset managers heading into 2024 ?

It is hard to believe we are already in the final month of 2023. For investors, this year has been one of the toughest to predict as both macroeconomic and geopolitical forces have combined to weigh heavily on global growth.

Most of the world is still recovering from the global pandemic, while Russia’s invasion of Ukraine has meant war has unfortunately persisted far longer than anyone would’ve hoped. The economics of 2023 have largely been driven by monetary policy. Rising rates and rising inflation put pressure on the cost of living, while also placing many businesses under significant pressure amid a new economic landscape.

The battle to avoid recession is now in full swing. The past couple of months appear to indicate the market has paused for thought as policymakers decide their next steps. Inflation is starting to fall, prompting rate rises to end, but there is no indication rates will be cut any time soon. Take the UK for example, we could possibly not see any cuts until well into 2024. That has a huge impact on the mortgage market as homeowners roll off their existing deals to find they are paying much more at these higher rates.

Figures from the International Monetary Fund predicts growth is forecast to slow from 3.5% in 2022 to 3% in 2023 and 2.9% in 2024*. The projections remain below the historical (2000–19) average of 3.8%*.

With volatility, uncertainty and dispersion in returns on the rise, choosing the right funds in this environment can be tough – but for those who want a one-stop shop, multi-asset funds offer a sensible solution. They offer investors exposure to a broader range of assets, sectors, strategies and direct investment exposures (e.g. individual securities, bonds) with greater flexibility.

They are ideal for uncertain times such as these, with investors ploughing in more than £5bn in net retail sales in the first nine months of 2023 alone (by contrast over £3bn has been pulled from equities)**. With this in mind, we spoke with a number of our managers to get their views on the market heading into 2024.

Could recession bite in 2024?

It’s been a year where investors have arguably been expecting the worst and hoping for the best. The old saying “Don’t fight the Fed” seems to have fallen on deaf ears, with equities showing resiliency amid the Federal Reserve’s attempts to cool markets down by raising rates. This has started to change recently, with rate rises on hold and equities posting a negative return in Q3***.

WS Wise Multi-Asset Growth manager Vincent Ropers says we are still in a transition period, where questions over inflation and interest rates peaking are still being asked. “There is a lot of confusion everywhere and even if you have read the macro picture perfectly well, I’m not sure you would’ve made a lot of money as things have moved around so much. It has depended on what central banks have been saying month to month.”

The threat of a US recession has persisted throughout 2023. The consensus estimate on the probability of a meaningful downturn in the American economy in the next 12 months stood at 65% at the start of this year, according to Goldman Sachs Research****. Where the US goes, the world tends to follow, but, as yet, recession has been averted.

Aegon Diversified Monthly Income manager Vincent McEntegart cites two reasons for this resilience. The first being the impact of rising rates on the cost of living being mitigated to a degree in the US by the fact that around 90% of US households have 30-year fixed rate mortgages^.

He says: “This has allowed the US consumer to keep spending in a rate hiking cycle. The same logic applies to the large US corporates (reason number two), they’ve all borrowed money in the past four years and it may be over a 10-year timeframe at these lower rates.”

Vincent McEntegart believes recession is still possible early in 2024, but says we’ve been talking about it for so long that investors/markets have prepared for it. As a result, he believes a short and shallow recession is very much possible.

Waverton Multi-Asset Income manager James Mee says a recession is possible – not probable – indicating we are likely to see a slowdown. However, he points to some positive indicators for markets, including a strong services sector and manufacturing improving.

“There’s a good reason to believe just from the macro data that things might improve. There’s industrial manufacturing confidence and expectations of more capital expenditure in America,” he says.

Bonds, bonds and more bonds

The sharp rise in bond yields has resulted in a number of multi-asset managers beginning to dial down their alternatives exposure in favour of traditional fixed income in the past 12-18 months. BNY Mellon’s Paul Flood has cut his alternative exposure from 40% to 20%, increasing his bond allocation as a result (almost 30%)^^. While the likes of Aegon Diversified Monthly Income now has 50% in fixed income^.

Although rates may have peaked, Paul says he could still add incrementally to bonds if things remain unchanged citing the fact that investors can still get 5% on government bonds. He says: “We are certainly not at our maximum position. But we’re gradually moving more into bonds and more into longer duration bonds.”

Paul has increased his duration on the portfolio from 0.4 years to around 1.7 years in the past 18 months.

Vincent McEntegart says he has only started to dip his toe into longer duration (currently the portfolio has an average duration of 2 years)^. One of the principle reasons for this is the fear of inflation spiking again, causing bond yields to rise.

Mixed outlook leads to defensive positioning

Generally there is no consensus on where markets go from here. Orbis Global Balanced fund manager Alec Cutler says there are four negative contributors to markets at present in the shape of higher levels of inflation; the “scary” levels of indebtedness; rising global conflict – and the impact it has on international trade; and valuations.

Commenting on valuations, he says: “They all start impacting each other. And that to me is a pretty ugly picture for investing in general. Equity markets are very expensive versus history.”

Alec has a number of defensive positions in the portfolio, having bought Treasury Inflation-Protected Securities, or TIPS, 18 months ago when they were yielding 1% (they are now yielding between 2.5 and 3%). He also has a 10% position in gold and an overweight to energy stocks^^^^.

Vincent Ropers says: “We’re definitely not positioned for a big macro call. At the moment we have a portfolio of extremely attractive, idiosyncratic bets where we think that there is lots of margin of safety thanks to the valuations – and some very strong upside potential.”

Examples of this include positions in the likes of absolute return funds, infrastructure and healthcare.

ITs lead the way as valuation opportunities sharpen the focus

But there are opportunities – not least in the investment trust space, where discounts are at 15-year highs. Both Paul Flood and Vincent Ropers point to the 40-50% discounts we’ve seen in areas like renewables and infrastructure trusts, with the latter calling some of them “wholly unjustified”.

Vincent McEntegart says the increased yields on offer in the bond market has also allowed him to tap into some growthier positions, citing Microsoft, which own 49% of OpenAI (which owns ChatGPT)^ as an example.

James Mee says the team are finding ideas across global equities and real assets. He also adds that if inflation were to fall back to 2%, he would expect his portfolio to be in a strong position. He says: “I think some of the real asset names could double and we should get 20% from our fixed income positioning. We’ve also got credit in there, which should also perform well in that environment.”

*Source: IMF, World Economic Outlook, October 2023

**Source: Investment Association, 30 September 2023

***Source: Schroders, October 2023

****Source: Goldman Sachs, January 2023

^Source: Aegon, November 2023

^^Source: BNY Asset Management, November 2023

^^^Source: fund factsheet, 30 September 2023

^^^^Source: Orbis, November 2023