The five trends that may impact your investment outcomes in 2024

As the world changes, so are the trends that influence your investment decisions, but long-term planning remains key

There is no crystal ball to help investors choose the share or unit trust fund that will deliver the best investment returns over the coming year, but there is a wealth of information about the themes and trends that will influence asset allocation decision making and investment outcomes in 2024. 

From a global perspective, the fund management experts single out the lingering risk of recession in developed markets, most notably the US; the “unwind” of the high inflation, high interest rate environment; and geopolitical uncertainty due to the Russia-Ukraine and Israel-Palestine conflicts as among the key influencers on financial markets next year. They also warn that investors will have to closely monitor developments in both private sector and regulatory responses to the energy transition, climate change and technological advances. 

US recession slowdown

John Orford, a portfolio manager at Old Mutual Investment Group, says a US recession is still part of the asset manager’s base case for the coming year, and warns that China’s sluggish economic growth will not offset the resultant slowdown in global economic activity.

Mark Phillips, Co-Deputy CIO and Strategist at Sanlam Investments Multi-Manager, says a US recession would impact global trade and investment flows, potentially leading to reduced demand for South African exports, affecting the country’s already lacklustre economic growth. “Diversification across geographies and asset classes is crucial for local investors seeking to mitigate the impact of a US-led global slowdown,” he advises.

But Mike Adsetts, CIO at Momentum Investments, believes these concerns are overstated: “The discussion has moved from a strong recession view to talk of a soft landing; US employment has remained robust and without exogenous geopolitical shocks there is a reasonable chance that [a] recession will be avoided.”

Weaknesses in the US economy are likely to persist. “If we do get a recession, we could see inflation go down a bit further, freeing up the US Federal Reserve (US Fed) to cut interest rates, though nowhere near to the level that we had post the 2008-9 Global Financial Crisis,” Orford says.

Inflation, interest rates ‘roll over’

The trajectory of interest rates will be a key driver of financial market outcomes in 2024, with the US Fed potentially moving from a “higher for longer” stance to one of cutting rates. And globally, central banks’ responses to inflation will become major influencers of investment flows to and from the fixed income and equity classes.

“There are upside risks to inflation, but the general view is that inflation is on a downward trajectory and as such, interest rates will follow,” says Adsetts. Momentum Investments believes that domestic interest rates could begin easing as early as the first half of 2024.

Phillips says that the potential moderation of interest rates during 2024 could trigger renewed interest in riskier assets. “The pace of the interest rate ‘unwind’ will be key,” he says, before conceding that the South African context might be different due to domestic inflation pressures and currency dynamics, which may contribute to a more conservative approach from the South African Reserve Bank. 

Geopolitics and global economic patterns

“The outcome of multiple global elections and ongoing geopolitical tensions, particularly in the Middle East and Asia-Pacific regions, will affect market volatility and drive strategic asset allocation decisions,” Phillips says, reminding readers of the situation in Taiwan. 

“Emerging from the pandemic, the world will watch China’s continued shift away from real estate-led growth, and the ripple effects of potential recessions in the US and other advanced economies,” he says.

2024 could end up being a year of “multi-polarity”. According to Orford, we are moving from a post-World War II environment, where the US was up to 50% of the global economy and “wrote the rules” for the global financial framework to one where other emerging economies now play a more significant role.

Energy transition and climate change

Asset managers will continue to improve their impact and sustainable investing methodologies over the coming year. Entering 2024, portfolio managers are going to great lengths to elevate the environmental and social outcomes from their investing activities, at all times cognisant of the unique requirements in the domestic market, including the fact that a just energy transition is non-negotiable for South Africa.

M&G Investments (UK) Fund Manager Alex Araujo points out that the transition to renewable energy will create countless opportunities for allocators of capital and investors over the coming years: “Infrastructure is widely acknowledged as central to the long-term energy transition, with utilities playing a pivotal role in the development of renewables; the reconfiguration of grids to accommodate new sources of energy; and the development of low-voltage networks for the modern age … the tailwind for infrastructure is here to stay.” 

In South Africa, billions of dollars are directed to electricity transmission infrastructure, renewables and green hydrogen. “Investments in green, sustainable technologies will grow, influenced by global policies on climate change and the transition to cleaner energy sources,” agrees Phillips.

Technology, especially AI

AI has been a dominant theme in global equity markets recently, because it can help businesses reach new levels of efficiency and enhance long-term growth for shareholders.

“The burgeoning artificial intelligence (AI) sector, alongside ongoing digital transformation, will shape investment in technology stocks and funds,” says Phillips. “There could be significant interest in AI-related investments, but with a careful eye on regulatory developments.”

Araujo opines that investing in listed infrastructure provides exposure to the explosive growth in AI in many ways, citing data centres as “critical to AI’s success, given the ongoing demand for computational resources”.

The adoption and application of AI will also become integral to addressing environmental and social concerns, with the potential for the technology to revolutionise global listed infrastructure by facilitating the development of smart grids and improving water resource management through machine-learning algorithms and real-time data analysis.

How to invest under the five key themes

“A well-diversified portfolio with an appropriate level of growth exposure is the most prudent approach,” says Adsetts. “Currently, cash and shorter-duration fixed interest investments are providing good returns, especially in South Africa.” 

However, as inflation and interest rates “roll over”, longer dated bonds will offer better return prospects. Momentum Investments expects “reasonable valuation underpins” in local equities and global equities.

“Multi-asset portfolios may see a higher allocation to commodities as a hedge against inflation and geopolitical risks, and may also increase exposure to equities that may benefit from a potential economic soft landing,” Phillips says. 

He singles out unforeseen global economic downturns; unexpected inflation spikes; and sudden changes in interest rates as potential risks that investors should be cognisant of, and admits that continued geopolitical uncertainty could steer allocators of capital towards alternative markets and so-called non-correlated assets. Overall, 2024 investment decision making will be dominated by robust real yields and retreating inflation. “These dynamics, combined with forecasted interest rate cuts, render global bonds appealing,” Phillips notes. 

Orford agrees:“The yield is much higher, so offshore bonds are more attractive; and we think the cyclical theme supports bonds over equities, too,” he says. In this context, OMIG has taken positions in global bonds, and in underweight equities, across its multi-asset fund universe. Gold is “somewhat attractive in a multi-polar world, where there is a lot more geopolitical risk”. 

What about offshore versus onshore?

South African investors who obsess over their offshore versus onshore portfolio “mix” should take a balanced approach, and steer away from knee-jerk responses to investment themes and trends. “South Africa is so integrated into global markets that what happens globally will have a significant impact on local returns,” notes Adsetts. He adds that despite concerns about load-shedding and the looming 2024 National Elections, local assets remain well-priced, with local JSE-listed firms benefiting from a growth-oriented environment.

Sanlam Investments calls for a balanced, prudent approach to the offshore versus onshore debate, with a mix of onshore assets to capture local market growth and offshore investments to access international diversification and potentially higher growth markets.

“When it comes to South African assets, the strategy leans towards an overweight stance, expecting the rand to appreciate in a scenario where the global economy experiences a soft landing; conversely, foreign assets should be increased in the latter half of 2024, banking on the strength of the rand,” Phillips says. 

Responding to 2024 investment themes

“It is always useful to consider trends, but you should not let them distract you from your long-term view,” warns Adsetts. He says the “secret sauce” to long-term investment success is to consider your investment goals and duration, and invest appropriately. 

“The key message to investors should be to identify a plan and stick to it; the compounding power of staying invested, and the dividends and income that you plough back into your preferred  investment vehicle, will put you in a much better position over time,” Orford concludes.