IMPENDING rate cuts and rising geopolitical risks suggest that investors need to re-assess their investing strategies in 2024. This includes moving assets from cash to bonds or equities, as well as diversifying in geographies and asset classes to capture growth.
These views were shared by speakers and panellists at HSBC’s Premier Elite Market Outlook 2024 event, which was held at the Mandarin Oriental on Feb 6.
While 2023 had produced good returns across multiple asset classes, investors should stay invested to capture growth amid a US soft landing and interest rate cuts.
“The strategy has to change when it comes to an environment when interest rates are falling,” said James Cheo, chief investment officer, South-east Asia, HSBC Global Private Banking and Wealth.
He also noted that the world is becoming increasingly complex, with risks from rising geopolitical tensions and numerous elections this year.
The dinner and market outlook event was presented by HSBC Premier, with The Straits Times as the official media partner. It addressed topics from investing in equities and bonds, to the impact of a falling interest rate environment and rising geopolitical risks.
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Interest rate cuts and bond investing
In 2023, most investors had kept money in cash, money market funds or fixed deposits, as these paid out higher returns amid the higher interest rates environment.
But the US Federal Reserve is expected to cut interest rates in 2024.
Investors should extend the duration of their investment-grade bonds ahead of policy easing. This comes as there is likely not enough compensation to move from investment-grade bonds to high-yield bonds, due to an almost parallel move in yields.
While peak rates have likely been reached, uncertainty remains in the speed and size of potential rate cuts in 2024, said William Goh, portfolio manager for fixed income at HSBC Global Asset Management, Singapore.
“Our view is that the Fed will likely start cutting rates in the second quarter of 2024,” he said.
This could lead to the yield curve normalising following an extended period of inversion, and short-end yields falling a larger degree than longer-dated yields over the course of 2024, he said.
Yet, properly timing a move into a longer-duration bond portfolio can be difficult.
Front-end yields also remain compelling against longer duration yields amid the currently inverted yield curve, Goh said.
Shorter duration bonds currently provide similar or higher yield compared to longer duration bonds, with lower duration risk. Capital appreciation, however, will be limited, he noted.
Meanwhile, longer duration bonds would still provide capital appreciation when interest rates eventually decrease, because bond prices move inversely with interest rates, and proportionally with duration.
Hence, a “duration barbell strategy” – the concept of simultaneously allocating to both the short end and long end of the bond duration spectrum – would help provide higher yields at the short end of the yield curve, as well as exposure to the longer end for greater capital appreciation when interest rates go lower, Goh said.
Ideally, both ends of the barbell should be well diversified.
It also helps to address uncertainty around when and how interest rates will move, because there is no need to precisely time a single move to increase duration.
Instead, one can move gradually into a long duration bond portfolio without giving up too much yield along the way, he added.
Diversification
Amid various global uncertainties, Cheo expects investors can manage tail risks by diversifying portfolios across geographies and asset classes.
While there are concerns over elections and geopolitics in 2024, he still expects policy continuity, especially in India and Indonesia. Financial markets also tend to perform well in the fourth year of a US presidential term.
Investors should broaden their exposure to US equities to benefit from a soft landing scenario.
Cheo noted that US stocks are not overvalued – while valuations have gone up in 2023, this was largely led by a few counters. US earnings are also more resilient than in other developed markets.
Investors should also diversify their exposure in emerging markets into structural growth leaders.
Asia may be a bright spot for investments, as steep valuation discounts across most of the region do not reflect strong Asian growth yet. Earnings in the region should also see strong recovery, Cheo said.
He expects another type of “AI” to take centre stage in 2024 – Asean and India – given that the two markets have moved up the value chain in manufacturing in recent years.
As for China, Cheo said some investors are overly pessimistic. While he does not expect China to recover in a V-shape, he noted that there have been efforts to help the economy recover.
Looking ahead, Cheo noted that cautious growth expectations in 2024 are setting a low hurdle to beat.
Global economic growth will likely be relatively slow, but stay positive. The US will likely continue to grow at a slow pace, while pockets of opportunities should emerge, especially in Asia.
While there was a banking crisis in March 2023, the US economy had stayed resilient as consumers continued to spend.
“For the world economy to see a recession, it would take a bigger shock than what happened in 2023,” he said.
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