A combination of factors points to a "benign" backdrop for multi-asset investors this year, the author of this article argues.

As firms have set out their asset allocation and investment views at the start of the year, one theme that appears to be a constant is a preference for investment-grade debt, a cautious attitude towards equities, and a slowdown in a move into private market assets. Higher interest rates have had an impact on this. As capital gets more expensive and firms focus more on the bottom line and their margins, it squeezes out more speculative activity. (It is arguably also a reason why ESG activity, while not going away, doesn't seem to be as busy as it was before the pandemic.) With the “risk-free rate,” as defined by yields on US Treasuries and other developed countries’ bonds, where it is (4.0 per cent on five-year US Treasuries, for example), yields on equities and other riskier assets must be significantly higher to justify their asset allocations. We have seen, for example, how Northern Trust has reached this conclusion. So much so that Northern Trust has shifted into bonds, and is scaling up its bond trading/investment desks, etc. 

In this article, An Do, portfolio manager at Julius Baer International, part of Julius Baer, sets out the Swiss private bank’s thinking on the macroeconomic and investment picture. This news service is pleased to share these views. The usual editorial disclaimers apply, so email tom.burroughes@wealthbriefing.com if you wish to react. 

Monetary policies are known to exhibit long and variable lags. That said, inflation has continued to normalise: from the double-digit highs last year, UK inflation has more than halved, and the US equivalent is close to only 3 per cent. As we make significant progress to reduce inflation, central banks have started to slow down.

Closer to home, sentiment in the UK economy has improved as trust in fiscal responsibility has recovered from last year’s turmoil and the economy has proved to be resilient. Having decided to keep interest rates stable, the Bank of England (BoE) remains more concerned about persistent inflationary pressure than already considering a rate cut similar to the US Federal Reserve or European Central Bank. The stickiness of UK inflation suggests that it will reduce towards its target in a more protracted manner, meaning that the BoE will hold its peak policy rate for longer than its central bank peers. Although a rising interest rate differential in favour of the UK will be a tailwind for large parts of 2024, the weak macroeconomic backdrop may prevent a stronger pound. 

Despite monetary headwinds, the US economy remains surprisingly resilient, and in its December meeting, the Federal Reserve signalled a crucial pivot. This could end a cycle that has seen 11 hikes. With the Federal Reserve pivoting to a less aggressive stance on rates, a more benign fundamental backdrop seems likely as we head into an election year for the US. 

Technology has led the market rally last year. This ascent, seemingly justified by robust growth prospects, underscores the divergence within the market. Many question if the rally leans on exuberant sentiment rather than concrete fundamentals. That said, many of these stocks are simply recouping the high watermark from 2021. Earnings growth for tech stocks has also outpaced the rest of the market. We would argue that much of the gains are underpinned by fundamental strength.

Unlike previous “hype” cycles in tech, artificial intelligence has not only captured the imagination, but also real additional dollars in tech profits. Taking a long-term view on artificial intelligence, much has been speculated about the potential to improve productivity and revolutionise business practices. 

Humility is advised amidst such epoch-defining shifts. History has taught us to beware of jumping to conclusions. The final winners and losers may have yet to emerge. Pioneers of the internet age in the late 1990s only laid the infrastructure for significant value-creation a decade later. We would caution against treating tech stocks as a homogenous group, as selection for quality of earnings is warranted amidst a changing landscape. We continue to focus on stocks with strong cash flows and business model defensibility. As always, diversification is key and we caution against making concentrated bets in such a new development.

For investors, fundamentals appear healthy as corporate profits hit an inflection point towards the end of 2023, and there are more signs of a broad demand for equities and a sustainable bull market.  As for bonds, the balance of risk appears to favour downside on yields, considering the ample margin of safety that had built up over the last two years. Overall, these factors provide a benign backdrop for multi-asset investors going into 2024.

About the author
An Do is a portfolio manager specialising in global equities. She joined Julius Baer from Barclays where she was responsible for global stock selection and tactical asset allocation. An is skilled in equity research and multi-asset investment strategy. At Julius Baer, she is responsible for equity selection in its flagship strategy, and a member of the Equity Group. She contributes views across global assets to the UK Portfolio Construction Team. An holds a BSc in economics from University College London.