Michaël Lok, group CIO and co-CEO asset management at Swiss private bank Union Bancaire Privée, discusses why markets offer a wide range of solutions that will need to be implemented intelligently and in an agile way in 2024.

Despite all the negative forecasts after 2022, risk assets delivered good-quality returns across most asset classes in 2023, and Michaël Lok at Union Bancaire Privée (UBP), believes that markets offer a wide range of solutions in 2024.

The good performance in 2023 is reflected in US and Japanese equities, but also in certain bond segments, with high-yield bonds having risen nearly 9 per cent since the beginning of the year, Lok said in a note. Dispersion within asset classes is the order of the day, but it shows that cash was not the only investment solution to obtain largely positive returns in 2023. These comments also apply to diversified management, as balanced portfolios provide highly satisfactory performances, he added.

“Excessive caution would therefore have been rather penalising at this stage. It would also have failed to recover the lion’s share of the losses recorded in 2022,” he continued. “The good news is that markets now offer a wide range of solutions that will need to be implemented intelligently and in an agile way in 2024.” This situation leaves him confident about the coming months, despite the low visibility on macroeconomic data, which is expected to improve in the first part of the year.

Lok believes that recession risks are waning in the US and Europe, as targeted fiscal stimulus packages stay in place. Inflation should continue to ease towards its target by end-2023. “Central banks should stay on the sidelines in the first half of 2024, but interest rate cuts are more likely in the second half of 2024,” he said.

Cash versus fixed-income strategy
Lok thinks that investors should move from cash to fixed income in order to lock in current attractive yields. He is targeting yields of 2 to 2.5 per cent on German 10-year bunds and 4.5 per cent on US 10-year Treasury bonds.

Equities
Equities remain UBP’s core holdings with preferences for technology and Japan. “In 2024, Japan is offering premium, secular earnings' growth over European and emerging market equities,” Lok said. “Look to software for earnings' growth and attractive valuations. For more cautious investors, rising volatility offers opportunities to generate equity-like returns via volatility strategies.”

"Though many will cite a weak yen as the key driver for Japan equities’ performances, in fact, it has been widening margins and the deleveraging of balance sheets that have accounted for nearly 77 per cent of corporate profit growth over the past decade," he said. The weak yen, Lok estimates, has accounted for 6 to 7 per cent of corporate profit growth.

Other wealth managers are also positive about Japanese equities in 2024. German asset manager DWS' top pick for Asia is Japan, both from a valuation perspective and in terms of earnings' growth, and it believes that Japanese equities are a good way of benefiting from China's growth opportunities. But UK wealth manager Brown Shipley is more cautious about the outlook for Japanese equities in 2024, seeing it as a more risky market, also as the yen strengthens against the dollar. See more here and here.

UBP also believes that structural shifts under way within and around the Chinese economy are presenting persistent headwinds. “During this stage, passive investing in Chinese equities is to be avoided. Instead, China-focused investors should identify new longer-term economic growth segments while emerging market investors can turn to Indian equities, which have kept pace with or outpaced China since the 1990s,” the firm added.

Nevertheless, UBP thinks that while opportunities emerge for India and Latin America due to supply chain diversification, the evolving landscape also introduces risks, including kinetic wars, regional power shifts, and unforeseen challenges such as 2016-style political disorder and stagflation.