Balancing Act – Investment Outlook 2024

2023 A year in review

2023 represented a strong recovery, particularly for equities. This recovery was driven by a combination of better news on inflation, optimism surrounding innovation in the artificial intelligence sector, the lack of a US recession, and a peaking of long-term interest rates.

The ‘AI revolution’ gained momentum throughout the first half of the year, as companies such as Open AI and Nvidia made advances in artificial intelligence technology. Markets responded positively with large cap tech stocks in particular displaying sustained price growth.

In March the emergence of a bank-run on US lender Silicon Valley Bank, which ultimately led to its collapse, caused significant disquiet in the financial sector. The ensuing uncertainty resulted in a sell-off of banking assets and also culminated in the downfall of major global bank Credit Suisse.

Throughout the year, reported inflation rates eased further, particularly in the US. The Federal Reserve decided to pause rate hikes in June for the first time in the current cycle and maintained a holding pattern in its September 2023 meeting.

Towards the end of the year, lower inflation data in both the EU and US saw yields fall significantly, offering some level of capital return to investors in fixed income markets. The yield on the 10 Year German Bund peaked in October at 2.97%. At the end of 2023 the yield stood at 2.02%, down from 2.57% the previous year.

Equities Outlook

On an absolute basis, equities now look more expensive than last year but are broadly in line with historical averages. The equity risk premium is diminished versus previous periods, and this calls for a more balanced stance. However, there is still the potential for equity gains in 2024 and as active managers we are positioned to take opportunities at a geographical, sectoral and single stock basis.

From a geographical perspective, we are currently broadly neutral across most major markets (including the US). With a percentage of 70%+ of the global developed stock market, the US continues to be the most important and influential region within our equity book. At this time, within the US, we have captured the proceeds from some of 2023’s sectoral winners (including names associated with Artificial Intelligence), and our portfolio is as broadly neutral from a sector perspective as it has been for some time. 

Long term secular growth prospects in cloud computing, digital advertising, AI, and semiconductors are positive. In relation to other regions, with lower rates, a probable trough in economic activity and potentially a weaker dollar; non-US markets, which tend to be more cyclical, should fare relatively better than they did in 2023.

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Fixed Income Outlook

Our assessment of fixed income markets is more positive than it has been in some time, with bonds now holding an equal allocation to equities across multi-asset funds (where applicable). At some point in 2024, we may allocate to longer duration bonds for the first time across our Prisma fund range. Medium term inflation expectations remain anchored, and whilst eurozone sovereign debt has endured a difficult two years the price entry point and accompanying yield is now attractive.

In the US, there has been a peak in the ‘Fed fear’ rhetoric and the market is now pricing in four rate cuts in 2024. In terms of timing, March may come too soon for the Fed, and it is worth noting that whilst the market might cheer numerous cuts if they materialise as a result of lower inflation, a round of cuts due to economic growth missing expectations would not be positive for risk assets.

Within corporate bonds, we are taking a broadly neutral stance from an asset allocation perspective. Within portfolios we are relatively balanced from a duration viewpoint. In the face of higher funding and refinancing costs, credit spreads have so far been relatively benign. So far, both Investment-Grade and high-yield markets are well-behaved and offer nothing threatening in relation to lagged monetary policy effects.

Commodities and Currencies Outlook

With Gold hitting an all-time high in December 2023, allocations within multi-asset funds were rewarded. We continue to direct a material allocation into the precious metal. Much of the rise in prices has been attributed to increased purchases by central banks, particularly those seeking to distance themselves from the US dollar – a move accelerated by specific geopolitical conflicts over the last two years.

Economic theory states that commodities can do better in late cycle growth stages. However, geopolitics are always a crucial factor in this corner of financial markets. This can be evidenced by the latest developments in the oil price as a result of the Organization of the Petroleum Exporting Countries (OPEC) cartel. More economically sensitive commodities, such as Copper, may suffer if the widely forecast economic ‘soft landing’ fails to materialise.

In relation to the important EUR/USD currency pair, interest rate expectations will be a key influence as the exchange rate evolves throughout 2024. A weaker US dollar could provide support for key commodities such as Oil, Gold, and Copper. The Euro is potentially in the midst of a multi-year bottoming process versus the USD, but the partial USD currency hedge which we had in place throughout 2023 remains but was partially unwound throughout December.

For more information

The Zurich Investment Outlook is produced twice yearly and the full document is available on our website. This publication provides an in-depth insight into our current thinking and positioning, and expands on the reasons behind our economic views to our clients and customers.

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