As 2023 draws to a close, let’s explore what 2024 may have in store for investors and which strategies could serve them best. Kamal Bhatia, Global Head of Investments, recently asked our senior investment professionals where they see opportunities in the market across asset classes. They outlined investment ideas and key investment concerns amid a highly uncertain economic landscape—one that appears to argue strongly for an active approach.

Key takeaways

  • The prospect of higher-for-longer interest rates may lead to renewed focus on active management as the beta trade diminishes.

  • In a high-rate environment, active management and in-depth credit analysis are crucial for companies to navigate the challenges of raising finance and potential defaults.

  • Rising yields may make fixed income an attractive alternative asset class and active managers can identify fundamentally strong businesses.

  • Stock pickers can find opportunities in high-growth companies in Southeast Asia despite political and economic concerns.

  • Short-term data unpredictability necessitates an active management approach to navigate potential turbulence in markets and reassess interest-rate outlooks.

Active management to the fore next year

The prospect of higher-for-longer interest rates, which means the cost of capital will be at levels not seen for a couple of generations, is likely to remain a strong theme next year and may have a profound impact on the way investors think about markets. It is also likely to lead to a renewed focus on active management. Todd Jablonski, Global Head of Multi-Asset and Quantitative Investing, argues the higher-for-longer outlook and end of the ‘rising tide floats all boats’ era spells the death of the beta trade. Consequently, investors should focus on ‘unique, idiosyncratic opportunities’ as the disparity of returns widens with distinct winners and losers emerging.

In-depth analysis when selecting credits may also be required, according to Howe Chung Wan, Head of Asia Fixed Income. It could become harder for companies to raise financing in a high-rate environment and some may have to default—a prospect that highlights the need for active management.

However, rising yields also means fixed income offers a genuine alternative to other asset classes when building a portfolio. And while default rates will undoubtedly increase, active managers can identify fundamentally strong underlying businesses. Moreover, unlike equities, bonds are contractually obliged to continue paying an income over their lifetime, barring a default.

Howe recommends a barbell approach to building portfolios with an allocation to high-quality bonds you can hold through the economic cycle, plus exposure to duration to mitigate interest rate risk.

From an equity perspective, Christopher Leow, CEO and CIO Singapore, Equities argues for stock pickers who can choose from an abundance of opportunities in high-growth companies in Southeast Asia in 2024.

Nevertheless, he’s concerned investors forget what growth investing in a high-yield environment involves. For example, investors shun Thailand due to political-risk concerns and Vietnam because of economic worries. But as Chris says, opportunities exist at the stock level. Vietnam is home to many attractive growth companies that trade at a discount because of a recent market correction.

Investors could also encounter relatively high levels of volatility next year. A widely held view is the U.S. Federal Reserve (the Fed) along with central banks in the other advanced economies will cut rates as inflationary pressures ease.

Li Chen, Portfolio Manager of International Investment and Business Development points out, however, short-term data could prove unpredictable, as already was the case this year. If inflation fails to fall as fast as expected, markets could encounter turbulence as investors reassess the interest rate outlook. Again, says Li, this is an environment best suited to active management.

A focus on quality and a thematic approach could hold the key to success in real estate

Real estate is a highly interest-rate-sensitive asset class and Indraneel Karlekar, Global Head of Research and Portfolio Strategies, Real Estate believes the higher-for-longer environment calls for a particular approach. First, focus on identifying trends that allow you to invest with conviction over the long term. Second, target high-quality assets. Although investing in the office sector seems akin to ‘catching a falling knife,’ according to Indy, quality offices are still generating excellent rents.

Leisure sector surging ahead

Fun is also back on the agenda, says Indy. He explains a major trend that emerged after COVID-19 was ‘people want to enjoy life, to travel, go on vacation.’ Indy argues a massive rebound in leisure spending is underway in Europe and is also taking off in Asia. Indeed, he believes the rise of Asian travelers may be a key theme in 2024 and 2025. Investors can potentially make money out of the trend in various ways, including investing in the hotels required to accommodate all those travelers.

China problems exaggerated and the policy response misunderstood

China continues to be a focus of concern heading into 2024, yet Li believes many of China’s problems were misunderstood. For example, Li contends the negative coverage of China’s property market exaggerated the extent of the problems. He explains while ‘it’s a big deal, it’s not a huge deal’ because the government and central bank can stabilize housing prices in bigger cities.

While a number of developers collapsed this year, Li continues to add certain property developers to portfolios. Those owned by the state, for example, offer potential for excess returns because they benefit from robust government support. Li adds that concerns around local public debt also reflect a misunderstanding of the way government operates in China. He argues the state has a lot of assets on its balance sheet and it could liquidate those assets to pay off the debt. Moreover, the government demonstrated its willingness to guarantee other debt in China.

Chinese markets suffered this year due to the lack of transparency surrounding Chinese policy, says Li. He explains while investors know the Fed will step in to support the banks in times of crisis, such as during the Silicon Valley failure earlier this year—policymaking in the U.S. is far more transparent than in China. This year, China unveiled support measures slowly and on an ad hoc basis. Li, however, believes this will change and authorities will now begin acting quickly and decisively.

There are opportunities to be found in small-cap value stocks

While the media is keen to focus on ‘hot’ topics such as artificial intelligence, it ignores opportunities that lie elsewhere. Todd argues these opportunities include small-cap value stocks which are forecast to enjoy 5% sales growth next year, up from 1% in 2023, while earnings growth may surge from 3% to 20%. Todd cites U.S. small-cap stocks as an area where real value is to be found. Brazilian equities are also attractive, with many trading at eight times price/earnings (P/E). At the same time, economic growth in Brazil is rising and interest rates are falling.

In short, our investors believe 2024 could well prove as eventful as recent years. There may be plenty of opportunities for investors prepared to undertake careful analysis of where value can be found. An active approach may help navigate many risks they’re likely to encounter in the coming year.

View more information on our insights and global asset allocation views.

View our 2024 vision.

Disclosure

Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results.

Views and opinions expressed are accurate as of the date of this communication and are subject to change without notice. This material may contain ‘forward-looking’ information that is not purely historical in nature and may include, among other things, projections, and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information in the article should not be construed as investment advice or a recommendation for the purchase or sale of any security. The general information it contains does not take account of any investor’s investment objectives, particular needs, or financial situation.

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