There's a cautious note from wealth managers, but they're also staying invested in markets, including bonds.

Caution appears to be the watchword for major wealth management houses as they confront the uncertain economic environment. But they're not taking risk off the table, judging by comments last week from BNY Mellon and UBS, among others.

BNY Mellon Investment Management suggests investors should remain cautiously positioned in 2024, emphasising the importance of high-quality assets in times of elevated interest rates and economic uncertainties.

After months of efforts by major central banks to rein in inflation, the picture appears to be improving, but the question of where interest rates settle remains. BNY Mellon IM’s Global Economics and Investment Analysis team thinks policy rates will hover near 4.5 per cent over the next decade. The “higher for longer” mantra is creating an environment where financial conditions are likely to slow economic activity – possibly to the extent that growth contracts and jobs are lost.

“While there is a path to a solid year of returns, there remains an elevated chance that the downturn that was feared but avoided in 2023, was instead simply delayed by a year. That said, recession probabilities are diverging, which indicates opportunities to add value through regional and asset class diversification," Shamik Dhar, chief economist at BNY Mellon Investment Management, said in a statement.

Dhar spoke at an investment conference in Hong Kong last week, and the firm's comments added to a raft of outlooks and early-2024 statements about the sort of asset allocations most likely to bear fruit in an economy that faces a number of challenges (geopolitics, possible rises in protectionism) and opportunities (continued recovery post-Covid, new tech such as AI, and others).

UBS
UBS Global Wealth Management also told that conference how investor sentiment took a hit over the past few days as the Federal Reserve pushed back against market expectations for a first rate cut in March, with US retail sales coming in stronger than expected. Federal Reserve Governor Christopher Waller said the US central bank should take a cautious and systematic approach when it begins cutting interest rates, and that there is “no reason to move as quickly or cut as rapidly as in the past.” 

UBS thinks that markets’ expectations of a first interest rate cut in the US in March are too optimistic – thinking that the need for investors to manage liquidity and lock in yields remains pressing. It continues to hold quality bonds as most preferred in its global portfolios.

Nevertheless, UBS said that rate cuts are firmly on the horizon, with yields likely to decline this year. The US economy should head towards a soft landing despite recent resilient data, and quality fixed income has an attractive risk-return proposition.

“While yield volatility is likely to remain elevated in the near term, reinvestment risks for investors with high cash balances should point to allocations to quality bonds given positive return potential across a range of scenarios. We particularly like the five-year duration segment as it offers an appealing combination of higher yields and greater stability than the longer end, as well as some sensitivity to falling interest rate expectations,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said.

“Within equities, we like quality stocks, US technology, and emerging markets,” he added. “A 60:40 portfolio of equities and bonds delivered its third-best two-month return in at least three decades, in the final two months of 2023.” 

In short, Haefele thinks there is more upside for both equity and bond markets in 2024. His base case scenario is for a soft landing. “Lower interest rates, positive (albeit slowing) economic growth, and growing corporate earnings should support modest further upside for equities,” he said.

Lower interest rates will reduce returns and increase reinvestment risks for cash and money market investors. He thinks now is the time for investors to balance portfolios. Geopolitics are likely to remain prominent, but he thinks it is important to disassociate broad investment decisions from politics. He does not expect the recent escalation in the Middle East to have a major impact on global inflation, though it may add to market volatility in the near term.

Nuveen, the investment management arm of TIAA, is also positive on quality equities and bonds in 2024, and believes investors should think about overweighting fixed income in their portfolios to take advantage of current yields. See more here.

Other wealth managers also favour quality bonds in 2024. UK wealth manager Brown Shipley, Paris-based asset manager Carmignac, HSBC Global Private Banking, UBS Global Wealth Management see value in quality bonds in 2024. See more here.