Columbia Threadneedle Investments, a US asset manager, has just released its multi-manager outlook for 2024, looking at events and trends which could drive economies and financial markets and what this means for fund selection. 

As we go into 2024, inflation and growth are already weakening as the lagged impact of the rate hikes and Covid quirks work their way through the economy, according to Anthony Willis, investment manager at Columbia Threadneedle Investments.

"It is also interesting to note over half of the world’s population will go to the polls in 2024, so political uncertainty will be a factor in driving market sentiment,” Willis said in a note.

Willis highlighted how 2023 turned out to be a very good year, especially for Japan, but not so much for emerging markets. He outlined what didn’t happen last year, notably a recession in the US, the UK and eurozone, and a Chinese rebound post-Covid.

“China’s rapid reopening after extended Covid lockdowns in early 2023 was a welcome surprise but since then the economic rebound, after a decent start, has been underwhelming,” Willis said. “With the Chinese property market – some 30 per cent of GDP – in the doldrums, and the economy in deflation, expectations for broader stimulus remain. If the economy weakens further in 2024, further stimulus appears likely. This will have a positive halo effect on the wider region and would be a useful support for global growth at a time when western economic growth is so sluggish.” 

Politics
Willis believes that political noise will become more elevated in 2024, with half of the world’s population heading to the polls, notably in the US, the UK, South Africa, Taiwan over the weekend, Mexico and Indonesia, which could impact markets.

It looks as though a re-run of the 2020 elections in the US, and an ‘unpopularity contest’ between Biden and Trump is set for 5 November, he continued. Polling is tight, but suggests that Trump, who is ahead in these marginal states, is trusted more on the economy. Biden is also deeply unpopular, despite enormous government spending programmes and a large budget deficit. Given their unpopularity, Willis thinks there is a fair chance that a third candidate might emerge.

“While opinion polls in UK politics have a checkered history, all signs point towards a Labour government after the next general election, expected to be late next year on 14 November,” Willis added. Labour could win a landslide, which would give the new government scope to think more long term given that they could plan for a decade in power. This could be a positive for longer-term investment to bolster the supply side of the economy. But whoever wins the election, there will be no money in the pot, so boosting growth will require careful planning and communication to ensure that the government keeps bond markets on side, he said.

Bonds
Willis noted that 2023 was quite the rollercoaster for bond investors, and questioned whether 2024 would be a more normal year, where government bonds resume their traditional boring role in portfolios – stable returns and a yield above inflation. “It looks possible, not least as inflation eases and interest rates follow. Any wobble in the bond market will be driven by inflation worries or simply too much issuance as governments have to pay up to fund their ever-growing deficits,” he said. “Government bond issuance has been gobbled up by markets though of course we should not forget the biggest buyers of debt over the past decade – the central banks – are now a seller. The debacle in the UK in September 2022 is a reminder that the bond market’s patience has limits and with governments bouncing off fiscal limits across the western world, the willingness of bond markets will be necessary to fund government spending.” 

Willis is biased towards duration and neutral on equities. The firm is overweight in the UK and Japan. Willis believes that there will be investment opportunities in small caps in 2024, with the prospect of ‘soft’ economic landings and interest rate cuts allowing investors to take another look at a very beaten-up part of the market. “Small cap tends to outperform significantly on the other side of an economic downturn, so if we do see the worst of the economic data in the first half of 2024, a combination of lower rates and attractive valuations could put this sector of the market in the spotlight once again,” he said.

The Magnificent Seven
Willis also highlighted how seven companies were responsible for almost all of the gains in US equities in 2023, with a rebound from the poor returns of 2022 turbocharged by the hype around artificial intelligence. The S&P 500 has a concentration problem, a real headache for active managers, with the “magnificent seven” stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla – collectively holding a near 30 per cent weight in the S&P 500 Index, he said.

“Both Apple and Microsoft individually have a higher market capitalisation than the entire FTSE100 in the UK. They need to continue to deliver on earnings expectations to sustain their valuations – that may be easier for some than others,” he continued. These seven companies appear to have become an asset class on their own and seem to be seen as a ‘safe haven’ at times. History shows that such concentration does not tend to end particularly well. Some of these stocks may remain "magnificent," but probably not all seven, Willis concluded.