Ernst Knacke, Head of Research at Shard Capital, has given his 2024 outlook for investment markets.
He said: “As we enter the festive season, we are looking ahead to next year to assess the risks sitting on the horizon across several sectors/themes and asking ourselves how we should position our portfolios to achieve our portfolio objectives. Knowing that we can’t predict the future, we believe it is worth stepping back to take note of the bigger picture. Whilst history does not always repeat itself, learning from the mistakes of others is a key characteristic of successful investors.
Credit/Debt – “The capitalist system we live in is not only built on credit, but we have reached a point where evermore credit creation is necessary to increase output and avoid a collapse of the system as we know it. Indeed, over the last 40 years, central bankers and policy makers have consistently reduced the cost of capital to sustain credit creation, in an effort to suppress price volatility and maintain supernormal levels of employment. Whilst this has had significant benefits with regards to our living standards, as well as the innovation and technological advancements, the reality is we have perhaps pushed a bit too hard on the debt-pedal.
“Global bond markets have effectively become refinancing markets, and the gargantuan amount of high yield and investment grade credit that needs to be refinanced over the next 3 years is a major concern. The reality is that the default cycle, just like the narrative of interest rates, is ‘higher for longer’, in the absence of a decline in interest rates. We like a yield of 5% on government bonds, and increasingly on the longer end of the curve where capital appreciation potential is looking very attractive with a medium-term view. For corporate bonds on the other hand, the risks are very much skewed to the downside.”
Inflation – “The pandemic-induced fiscal splurge, exacerbated by the energy shock resulting from the Russia-Ukraine war, drove inflation to levels not seen in decades. Central Bankers moved from “transitory” to “structural” relatively swiftly, albeit too late, and they embarked on a path of curbing inflation through tightening monetary policy at the start of 2022. The market is pricing a success story and the soft-landing narrative is again taking hold, however we remain sceptical. The cyclical benefits of a fall in energy prices are behind us. Ahead of us are the economic consequences of tighter monetary policy, which we know comes with long and variable lags – we are now entering the sixth quarter since the Fed first started hiking rates. History suggests the economic consequences are felt with a 5 to 9 quarter-lag. The deflationary trends are perhaps set to continue into H1, but not for the right reasons.”
US Dollar and Currencies – “The US Dollar has been too strong and this has had far reaching consequences. Firstly, it exacerbated cost-inflation in the rest of the world and was a major contributor to global economic weakness. Europe is already in a recession and the UK is running head-on into a property crisis. Further east however, there are more positive signs. The reality is that countries like China and India – in part due to capital controls – have been more insulated and retain much more power to determine their own destiny. The Japanese Yen is very undervalued, and we believe offers attractive risk-reward characteristics, although a collapse of the Japanese bond market would undermine this. As for the Dollar, there is still no alternative. If we enter a global recession, we expect the US Dollar’s safe haven characteristics to come to the fore and will likely go up even further.”
Equity markets – “The opportunity in our opinion can be found eastward. Japanese equities, especially local revenue generating companies, look very attractive in the
presence of ongoing reforms and a very undervalued currency. We also believe emerging markets are attractive, especially Latin America and Asia, including China where valuations remain very depressed. We understand the difficulties facing China, the housing market problems, the debt concerns, but it seems that all this and more is already being priced in. At the same time, capturing secular trends in AI, digitisation and healthcare is important. Whilst these exposures should not be core allocations in a portfolio, on the margins we believe some exposure is still warranted.”
