The performance of both equities and bonds is difficult to forecast this year, not least because inflation is hard to pin down and it is not entirely clear how economies will perform.
In 2023, bonds were largely trading between a soft landing and higher-for-longer environment, says Jamie Niven, senior portfolio manager at Candriam Bonds Total Return.
In 2024, that conversation will switch to a soft landing versus hard landing, and whether central banks have been too restrictive for too long, he says. That is a better environment for bonds.
“Whereas last year the two environments were almost polar opposites for bonds, this year’s hard and soft landing, both are quite positive for bonds,” Niven explains.
Matthew Rees, head of active bond strategies at Legal & General Investment Management and manager of the L&G Strategic Bond Fund, agrees.
But he says the market is pricing in disinflation and rate cuts aggressively, and “the mantra that we have in our team and our rates and inflation team is it’s very difficult to forecast inflation and everybody’s forecasting of inflation is, frankly, wrong and rubbish”.
That is why LGIM is “very nimble” in its forecasting and looks carefully at where valuation is in credit and rates, Rees adds.
When it comes to equities, which saw a small group of growth stocks – the seven biggest tech stocks or “Magnificent Seven” – lead outperformance last year, there are different competing forces at play, says Louise Kernohan, head of global equity opportunities and co-manager of Newton Investment Management’s global equities strategies.
A big factor is artificial intelligence, how it develops and to what extent it gets regulated, she says, as well as geopolitical tensions between the US and China.
“Our approach is really looking at them on a stock-by-stock basis, we own some of them but not all of them, and it’s really looking at the fundamentals in terms of what we think will drive the earnings upgrades from here and the valuations,” Kernohan says.
“It will be a more balanced year for the Magnificent Seven. I don’t expect it to be such a significant driver of the markets and I think investors will, rather than just riding the wave of them, have to be a bit more discriminate.”
To hear more details of the fund managers’ valuation strategies, the risk of geopolitical uncertainty, and what upcoming elections might mean for investments this year, click on the link above.
carmen.reichman@ft.com
