Brown Shipley Positive On Quality Bonds In 2024

Amanda Cheesley Deputy Editor 13 December 2023

Brown Shipley Positive On Quality Bonds In 2024

This week, UK wealth manager Brown Shipley released its 2024 investment outlook, highlighting core dynamics that will drive the global economy, financial markets and key asset classes in 2024 and beyond.

After a year marked by interest-rate hikes and high inflation, Daniele Antonucci, CIO at Quintet Private Bank, parent of Brown Shipley, expects global economic growth to decelerate in the first half of 2024.

By mid-year, amidst slower growth and reduced inflationary pressure, Antonucci believes that central banks will start to cut interest rates, supporting a broad-based recovery over the second half of 2024 and beyond.

He thinks that investors will need to cut through significant “noise,” including elections, geopolitical uncertainty and regional tensions. “The shift towards a more multi-polar world that began with the pandemic continues to be evidenced by the fragmentation of supply chains, trade and finance,” he said.

“In 2024, investors will need to adapt to this uncertain landscape, including by considering exposure to assets that may provide defensive benefits, reducing portfolio risk,” he added.

Antonucci believes that high-quality government bonds, especially US Treasuries, look appealing heading into next year, as he thinks the central  bank rate-hiking cycle is over, with possible rate reductions from mid-2024. He sees yields as attractive and notes that they may offer a cushion should the economic outlook deteriorate beyond expectations. Conversely, riskier credit looks unattractive as it may suffer due to tight financial conditions and valuations that do not reflect the risk of an increase in default rates, he added. Other wealth managers also favour bonds in 2024. Paris-based asset manager Carmignac, HSBC Global Private Banking, UBS Global Wealth Management see value in quality bonds in 2024. See more here and here. 

While maintaining his conservative position heading into 2024, Antonucci is nevertheless tempering his cautious stance as interest rates have now peaked and markets appear to have already broadly priced in a moderate slowdown. This translates into a marginal increase in the firm’s allocation to equities, adding exposure to the UK and developed Pacific ex-Japan equities, notably Australia, New Zealand, Hong Kong and Singapore, and reducing its exposure to global equities. This is on top of quality US shares to support regional diversification and potentially capture different growth dynamics.

Although the firm has been quite positive on Japanese equities this year, Antonucci is more cautious about next year, seeing Japan as a more risky market.

“Emerging-market equities, by comparison, currently carry elevated risk levels that are not fully justified by their relatively cheap valuations,” he said. 

At the same time, Antonucci believes that increasing exposure to commodities may provide additional levers to protect against inflationary pressure, especially in the near term, as well as heightened geopolitical risk. Notably, this excludes increasing exposure to gold, which Antonucci thinks appears somewhat overvalued relative to other safe-haven assets. The firm is consequently increasing its exposure to broad commodities in 2024 to protect against inflation and geopolitics and reducing its exposure to gold.

Antonucci expects that the US dollar could weaken, albeit moderately, over the course of 2024, whilst the yen will strengthen.

“US Federal Reserve rate cuts, slightly widening fiscal and trade deficits, and persistent US dollar overvaluation could all weigh on the greenback,” he said. “As growth begins to rebound in the second half of the year, risk sentiment could also improve – supporting the euro and the pound sterling,” he added. However, he expects any US dollar weakness to be limited given that the European Central Bank and Bank of England are also likely to begin cutting rates in the second half of 2024.

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