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Investors started 2024 expecting that a slowdown in economic activity would prompt central banks to begin cutting interest rates as early as the spring.
But the prospect for a reduction in borrowing costs has been pushed back as the US economy, in particular, has proved more resilient than most market watchers had predicted.
Other risks remain. Geo-political tensions in Ukraine and the Middle East, for example, threaten to de-stabilise industrial sectors such as energy and international freight transportation.
As always, there is plenty for investors to weigh up. To help, we’ve asked a panel of investment experts – Rob Morgan (RM), chief analyst at Charles Stanley, Lindsay James (LJ), investment strategist at Quilter Investors, Niall Gallagher (NG), investment director, European equities, GAM Investments, Rob Burgeman (RB), investment manager at wealth manager, RBC Brewin Dolphin, Kasim Zafar (KZ), chief investment officer at EQ Investors, Rachel Winter (RW), partner at Killik & Co, Sanjay Rijhsinghani (SR), chief investment officer at LGT Wealth Management UK and Henrietta Walker (HW), investment specialist, Brooks Macdonald – to answer the key questions as we move into the second half of 2024.
What’s the most important overall guidance you can give investors for the rest of 2024 and beyond?
RM: This year has been more about companies beating or missing earnings expectations than about identifying successful themes and that should continue. It may be time to reconsider a purely passive investment approach of just buying the index.
LJ: Attention will continue to be focused primarily on inflation and interest rates, as well as geo-political factors, a number of important elections worldwide, plus the trajectory of earnings growth. Against this backdrop, diversification across asset classes and across regions remains crucial.
NG: The fall-out from the global financial crisis in 2007 to the end of the pandemic was a good period for quality growth stocks. But economic conditions are different now, so it makes no sense for investors to restrict themselves to this part of the investment ‘style’ universe. They will miss out on opportunities elsewhere.
RB: Investment is a marathon, not a sprint, and patience is often called for. Focus on the quality of your investments and understand that, aside from inflation and interest rates, other forces are in play. Notably, these include technological innovation, a positive, countered by the presence of geo-political tensions.
KZ: The best advice for investors in an environment of greater macro-economic instability is to have a well-articulated savings and investment plan. Crucially, one which includes a focus on risk attitudes and capacity for loss.
RW: I remain confident that equities will continue to generate good returns over the longer term [but] now could be a good time to reduce equities and add to bonds for anyone who has been considering lowering their risk level.
SR: Do not try and time the market. 2023 demonstrated the unpredictability of such an approach when the bulk of market returns came in the fourth quarter. Accept that different geographic regions may adopt different approaches to monetary policy so that interest rate hikes and cuts don’t align as they have in the past couple of years. This can impact volatility. A long-term perspective is therefore essential.
HW: Stay invested. Given prevailing uncertainty, we may well see short term sells-offs in bonds and /or equities. At this point, it might be tempting for investors to disinvest and park money in high interest cash accounts. However, it’s all but impossible to ‘time’ markets and the danger is that they will miss out on any gains when the market rebounds.
How can investors best position their portfolios against higher-for-longer interest rates?
RM: Higher interest rates are the wind that blows no good for asset prices. But there are a few sanctuaries from this tempest. Cash and short-dated bonds are a resilient source of returns for a low-risk element of a portfolio. Energy and mining stocks are a natural harbour should higher commodity-driven inflation persist and prevent interest rates from being cut.
LJ: In contrast to the UK and Europe, where interest rates could be cut this summer, the US seems unlikely to follow suit until well into the second half of 2024, setting the scene for divergence between key economic blocs on either side of the Atlantic. All else being equal, this could see sterling and the euro weaken against the dollar, an environment which is generally supportive of UK equities, given the prevalence of dollar-based earnings. It also favours gilts and European sovereign bonds over US Treasuries.
RB: We still think the environment is a conducive one for investors looking for long-term returns. Bond markets offer far better returns, and this may well be an excellent opportunity to lock into the higher rates currently available.
KZ: In an environment of higher for longer interest rates, the short end of the yield curve, in the form of short-term bonds, is a great risk-adjusted investment as well as being a good portfolio diversifier.
RW: Banks tend to do well in higher interest rate environments as they can charge more on loans.
SR: Investors should focus on high-quality businesses with wide ‘economic moats’ that have clear pricing power. Historically, such companies have proven to be effective hedges during inflationary and high-interest periods, as they can maintain profitability by adjusting prices in response to economic conditions.
HW: Shorter dated bonds now offer a decent return for investors without taking too much ‘duration’ risk. However, it seems reasonable to assume that interest rates will fall at some stage. So our current view is therefore that investors should position portfolios with a balance between equity ‘value’ and ‘growth’ styles.
Inflation remains above central bank targets. How can investors take advantage of this?
RM: There are appealing opportunities in the infrastructure sector, where cashflows tend to be inflation linked. More broadly, shares in companies that retain pricing power ought to be resilient. Although fickle, gold might also remain as a financial haven and a worthwhile diversification from cash if ‘real’ interest rates fall.
LJ: In the event of inflation remaining above central bank targets, commodity-generating assets, such as the oil ‘majors’ and mining companies could perform well, while gold and precious metals can also offer a good hedge against inflation. Infrastructure assets often enjoy inflation-linked revenues, although valuations can be undermined by a higher ‘cost of capital’ that typically comes hand in hand with higher inflation.
NG: Despite inflation remaining above central bank targets, the consumer environment is picking up in Europe, as big energy price shocks begin to unwind. The combination of falling energy prices, falling utility prices, falling food prices, and rising wages should be very good for consumption in Europe helping to benefit stocks in the consumer staples sector.
KZ: Focus on businesses with strong pricing power that have the best chances of passing on higher costs to their customers while maintaining margins. Companies in the consumer staples, healthcare and industrials sectors enjoy such status.
RW: Few assets actually benefit from high inflation, as we experienced in 2022, when both equities and bonds fell heavily. I would say this is more a question of how to protect portfolios than how to take advantage. Shares in companies selling lower cost items can do well when inflation is high as consumers will try to reign in their spending. For example, McDonald’s shares proved relatively resilient in 2022 when inflation spiked.
SR: Persistent inflation above central bank targets presents opportunities. Equities are typically a good hedge against inflation as high-quality businesses can raise the cost of their goods and services in line with inflation. Investors may also consider buying bonds, both sovereign and credit, which currently offer returns that exceed inflation and cash.
HW: Look at commodity producers, such as oil and gas majors, which may perform well in times of higher inflation, although a higher oil price also contributes to higher inflation. Banks and insurers are well placed to take advantage of the higher interest rates associated with above-target inflation. Infrastructure companies may do well if their income streams are inflation linked.
What are the biggest threats to investors’ portfolios and what can they do about them?
RM: Perhaps the biggest risk comes from not being aware that the tax net tightening. The UK’s dividend and capital gains tax allowances are now a shadow of their former selves. Investors who don’t harness all the tax efficient allowances provided by the likes of individual savings accounts and pensions are increasingly paying the price.
LJ: Persistently high inflation remains the biggest threat to markets currently. But, happily, within the developed economies this seems to be limited to the US, supporting the argument for international diversification. Investors can protect themselves with asset class and regional diversification, making an accurate appraisal of their ability to take risk and appetite for risk, at a time when uncertainty remains high. Ensuring that portfolios contain ‘ballast’, such as developed market government bonds or safe haven assets such as gold is a sensible approach.
NG: It might be a good time to start thinking about diversifying away from the US. Not necessarily selling and buying elsewhere, but perhaps adding something a bit different to the outstanding US equities that a client might already hold.
RB: Risks always exist, some of which are foreseeable and some not. To a large extent, this is a necessary evil of equity investment and needs to be accepted. Most likely is the prospect that inflation falls far slower than expected and interest rates stay higher for longer, damaging sentiment and creating a challenging environment for both equities and bonds. A well-diversified portfolio by asset class, by region and by sector should provide some financial protection.
RW: The US election has potential to cause market volatility this year, but evidence suggests that elections do not have a lasting impact on the stock market. I find it reassuring to consider that the best global companies have survived and thrived through numerous presidential elections.
HW: Increased volatility is likely to be a feature of investment markets in the near and medium-term. Geo-political risk persists, with unresolved conflicts in Ukraine and the Gaza Strip. Although these conflicts have driven up the cost of commodities, prices are still below the highs reached in 2023. Investors can mitigate this risk by having some exposure to commodity producers.
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Which investment sector or region most appeals to you for the remainder of 2024?
RM: Global growth will recover slowly but currently lacks a clear trigger for a stronger rebound, which will hold some regions such as Europe back. Overall, the US has proven remarkably resilient and is likely to continue outperforming other developed markets over the medium term. The widespread strength favours smaller companies as the domestic economy remains on a strong footing.
LJ: Japanese equities have already enjoyed strong returns in the past 12 months, gaining 20% in sterling terms to the end of April 2024 and there are reasons to believe that this rally may continue. Corporate governance reforms are experiencing growing momentum, leading companies to become more focused on shareholder returns. At home, the UK market has been unloved and seen a number of businesses fleeing for new listings elsewhere or being bought out by larger international peers. There is an argument that peak pessimism has now been reached. With improving earnings forecast for 2025, and the potential for more activity on the IPO front, the UK could just be at the start of a journey that sees it perform well compared to its developed peers.
NG: We have seen strong performance from European banks this year. Banks have repaired their balance sheets, they are generating decent levels of return on equity, and they are profitable. We have a bias towards banks in southern Europe where we think there is still plenty of value. We are also overweight in the energy sector, as oil and gas stocks are cheap and generating plenty of cash, plus the sector has a significant role to play in the energy transition.
RB: We still feel that the US economy remains an extremely attractive option. The predominant technology companies are listed there and the economy itself is both self-contained, not being excessively reliant on foreign imports, and very resilient. In sector terms, the semiconductor sector offers exposure to the kind of upgrades that companies are going to have to make to take full advantage of the developments in artificial intelligence (AI).
KZ: Having invested in the AI theme since 2020, we firmly believe there is still a long runway for growth but it’s unlikely to be a straight line. One of the bumps in the road could be the energy supply needed to power the data centres for the cloud computing needs of AI engineers, especially given the renewable energy commitments of several of the larger AI companies. While the utilities sector is often viewed as a regulated income, low growth sector, there is potential for a substantial re-rating as the market prices in higher growth expectations for the sector.
RW: Energy management is an attractive sector right now. Companies are ramping up their use of AI, which is very energy intensive, while governments around the world are trying to reduce energy demand and emissions. Firms such as Schneider Electric are helping businesses to use energy as efficiently as possible, and their services are in demand.
SR: Emerging markets continue to look attractive. Quality as an investment factor is expected to perform well in the current economic environment. Specifically, financials in Europe appear cheap relative to their US counterparts.
HW: UK equities are well placed to perform strongly in 2024. The UK equity market is dominated by industries such as energy and materials, which include companies that generally benefit from rising prices. They also contain a high number of financials such as banks, which often perform well when interest rates are elevated.
