Over the past few years, the majority of developed markets have experienced the shock of going from an era of ultra-low interest rates to an aggressive rate-hiking cycle, in a relatively short period. Persistent inflationary pressures (mostly caused by lingering supply chain issues following the global pandemic) forced central banks to act quickly, and as a result interest rates in the UK and US are now above 5% for the first time since 2008. The impact on financial markets has been seismic.
We are now staring out at a very different investment landscape and although change can often be scary, we believe it’s an exciting time because there is so much to explore. Below we have shared our top tips for successfully navigating this uncertain terrain.
Prepare for uncertain conditions
Much of the recent volatility we have seen across equity and bond markets can be attributed to investors attempting to predict the future path of interest rates. The big question investors are trying to answer has moved from, ‘Will rates be cut?’ to ‘When will rates be cut?’
Progress on inflation and stable growth across developed economies supports a pivot from central banks towards rate cuts. Recent comments from Bank of England Governor, Andrew Bailey, that inflation does not need to fall to 2% before policymakers support a rate cut, generated a lot of buzz. As at the time of writing, a June rate cut from the Bank of England is now priced with a 66% probability in swaps markets. Similarly, investors expect the US Federal Reserve to cut interest rates at their June meeting after scaling back bets on a March movement.
However, communications from central banks are careful to take a cautious tone about cutting rates too quickly and remaining highly attentive to inflation risks. There are still plenty of inflationary risks on the horizon, including the strength of labour markets and wage pressures, as well as the escalation of the Israel-Hamas war and other possible disturbances that could send oil prices higher.
With all that in mind, although we expect to end 2024 with lower interest rates, we do not anticipate a return to the ultra-low rates of the 2010s any time soon.
Pack the right tools
We can take inspiration from Alfred Wainwright, who once said, “There is no such thing as bad weather, only unsuitable clothing.” The investment landscape may be different and more uncertain but with the right tools, you can imbue your portfolio with both growth potential and ballast.
The pain of the past few years has reset bond yields to their highest levels in almost a decade, making fixed income look very attractive. After a fruitless period where high-quality bonds were yielding just 2% or 3%, many investment grade bonds can now deliver over 5% with some offering 7% to 8%. This jump in yields is a game changer for investors who can now achieve a good level of income without being pushed into higher-risk assets as they were in the past.
In terms of equities, our view is that until a new significant macro catalyst emerges, developed market stocks, particularly large cap quality companies with defensive characteristics, are more likely to outperform or at least better manage to weather the volatility associated with capricious markets.
That said, we do not recommend completely eschewing emerging market equities that have exceptional growth potential; however, we believe a careful and active investment approach is essential when investing in these more volatile and less liquid markets.
Enjoy the views
It has been a challenging few years for investors, like a long hike with a number of false summits, but despite our cautionary tone around increased volatility, we do see indications that 2024 will be a good year for returns from both bonds and equities.
Yield is not the only source of return from fixed income assets, there is also scope for considerable capital appreciation as the interest rate cycle starts to turn down. As we have noted, the message investors are getting from central banks across the globe is that we are now at peak rates. As a result, fixed income assets are now poised to deliver attractive returns.
Global growth expectations have stabilised, near the same levels as last year, while disinflation is gaining momentum in developed markets. This all hints at a global soft landing, which should be broadly supportive of equities. The emerging markets growth outlook is also improving, with tentative hopes for stabilisation in China driven by policy support.
Specifically, we see opportunities in UK equities, which continue to look undervalued, and European equities too as data from the bloc improves with manufacturing data showing signs of recovering from its 2023 lows.
Mattioli Woods has all the tools you need to face these challenging market conditions and would be happy to guide you on your personal journey. We have several products on offer that are well placed to take advantage of the opportunities in both fixed income and equity markets.
The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.
This article has been produced for information purposes only and is not intended to be an invitation to buy or act upon the comments made. All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods plc and may be subject to change.
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.
