According to ANZ, 2024 could mark the end of the bond bear market, with fixed income allocations set to play a key role in building more resilient portfolios.
In its 2024 Global Market Outlook released on Wednesday, the bank said it expects tactical positioning to come to the forefront in the face of market volatility.
“In 2024, we commence the year with a tactical preference for investment grade and sovereign bonds across portfolios – both global and domestic. As we enter a period of expected vulnerability, and with yields at elevated levels, investors have a unique opportunity to build more resilient portfolios by increasing their allocations to fixed income,” ANZ stated.
It is mildly overweight Australian fixed income, given the Australian economy has proven robust despite 425 basis points of tightening from the Reserve Bank, and GDP growth is forecast to print at 1.2 per cent in 2024.
According to ANZ, the RBA has delivered its final interest rate hike for the cycle and the first rate cut could materialise in the latter stages of the year.
Additionally, unemployment remains low, inflation appears on a slow track to target, and wage growth is strong.
“To the outlook for fixed income, Australian yields have fallen sharply from their peak at the start of November, leaving room for them to push higher once more – particularly if economic data surprises to the upside and the market is forced to remove cuts that are currently priced in.
“Although we expect some spread tightening between 10-year US Treasury and Australian government bond yields over 2024, we largely expect yields to move in a similar manner. However, with the RBA likely to undertake a later and shallower easing cycle than the Fed, any rally at the short end is expected to be less aggressive than in US Treasuries. This is likely to result in a flatter curve relative to the US,” the bank stated.
Similarly, ANZ is overweight international fixed income, noting US 10-year Treasury yields finished higher for the third straight year, the first time since 1981.
“The market is currently pricing in seven rate cuts for 2024, starting in H1 – in our view this seems aggressive. At this stage, we don’t expect the Fed to commence easing until Q3, although conditions could begin to materialise before mid-year that bring this timing forward.
“We expect the Fed to resist easing until it can be confident that inflation is on a sustained path back to target. The current mismatch in job openings to unemployed remains inconsistent with the Fed’s inflation target, disinflation doesn’t appear strong enough nor growth weak enough to warrant an early pivot.
“Nonetheless, as witnessed over the latter part of last year, in 2024, the bond market should react favourably if it receives more dovish rhetoric from central banks and the timing of initial rate cuts become clearer.”
It predicted this environment to be “accommodative” for government and investment grade credit, where it currently holds overweight positions across fixed income.
In contrast, it is modestly underweight in equities overall, with a current preference for developed markets and European shares in particular.
ANZ private chief investment officer Lakshman Anantakrishnan elaborated: “European shares are trading at a sizeable discount to the US, and we find it difficult to reconcile how this can widen further. Especially given rate cuts are expected to come earlier from the European Central Bank, profit growth should be similar to the US, and more consistent across sectors.
“This theme of investing in previously underperforming and cheaper segments of the market, whilst remaining defensively positioned overall, is likely to be a feature of our portfolios this year. Providing the opportunity to participate in any rallies while seeking to limit the downside in the event of a broader market pullback.”
Mr Anantakrishnan added ANZ may seek to tactically tilt its equity positioning towards higher beta segments – such as those positively exposed to AI – while ensuring a defensive bias across the broader multi-asset portfolio.
Other key areas for the CIO in 2024 are the US consumer, rising credit risks, and geopolitics – particularly in the lead-up to the US election.
“Alongside growing US fiscal concerns, the Fed’s reaction function, and further advancements in AI, these are just some of the topics we expect to drive market direction in the year ahead.”
Its 2024 Global Market Outlook suggested one key factor will be positioning for any global easing cycle.
“Emerging markets, cyclicals, real estate, small caps, and the value sector could be among the beneficiaries,” Mr Anantakrishnan said.
He continued: “For investors, 2024 appears delicately poised. A soft landing may allow equities to continue climbing; a misstep from the Fed could prove otherwise. So, while we commence the year positioned defensively overall, we will seek to actively exploit opportunities across risk assets as we navigate what is likely to be another volatile year for markets.”
