Two wars, a potential recession, upcoming elections in the UK and the US, and the ongoing threat of inflation are just some of the risks identified by Morningstar in its 2024 outlook.
But Morningstar’s chief research and investment officer, Dan Kemp, has reminded investors that the presence of uncertainty “does not imply a scarcity of opportunities”, with the firm adopting a cautious yet optimistic approach for the year ahead.
“For those in Australia, and Asia-Pacific more generally, the investment arena may appear daunting given recent market volatility. Yet we see investment opportunities emerging. Periods of market volatility and pessimism should not be seen as a barrier to investment but rather are a normal part of the journey to reach financial goals,” he said.
“We know that 2024 will bring surprises for all investors, so rather than treat the future as if it is encoded in a crystal ball, we’ve focused this outlook on the wellbeing of the investor. We see positives in this environment, with opportunities to add value in fixed income and selected equity markets, among other ideas.”
Chief investment officer (CIO), Asia-Pacific, Matt Wacher, reinforced that Morningstar is “cautiously optimistic” for both stocks and bonds entering into 2024.
Outlining the firm’s best investment ideas for next year, Mr Wacher explained that Morningstar sees opportunities in size, style, sector, and country exposures in equities.
“Equities look fairly well positioned as we start 2024, despite facing a wall of worry. Equities are generally considered reasonably valued overall, with all major countries better placed than a few years ago from a valuation standpoint,” he said.
Dialling down into specific opportunities, Morningstar pinpointed a number of sectors for investors to consider.
“Looking for undervalued assets that can help with portfolio robustness, we see defensive global sectors – including healthcare and utilities – as areas of interest,” the firm said.
“They are not necessarily the cheapest sectors, but can play a strong role in portfolio risk management. Among the more economically sensitive sectors, our preference remains for global communication services, despite strong returns year-to-date. It still represents solid value and a reasonable risk-to-reward ratio.”
Among a basket of “undervalued and unloved assets”, Morningstar asserted that smaller-capitalisation value stocks stand out. But the firm warned that careful asset selection is needed while also highlighting the importance of focusing on quality.
Morningstar suggested that the broad opportunity in emerging markets (EM) has become more significant over 2023, as EM stocks have lagged their developed market (DM) peers.
Much of this lag, the firm said, can be attributed to Chinese stocks, as investors have taken into account looming geopolitical and secular growth concerns.
“Despite the risks – or maybe because of them! – China itself has become a very interesting opportunity,” the firm stated.
“Chinese equities carry particularly low expectations. However, over the long-term, consumer-facing Chinese technology equities trade at a substantial discount to normalised earnings and are anticipated to generate excess returns against broad emerging markets.”
Turning to fixed income, Morningstar argued that an abundance of opportunities now exist offering up positive real yields, including DM bonds (excluding Japan), EM debt, and inflation-linked bonds.
The firm has a preference for government bonds over corporate bonds, with the former looking “as attractive to us as we’ve seen in at least a decade”.
“At the same time, corporate bonds also look attractive, but the ‘spread’ between them is on the tight side,” the firm explained.
“This is best expressed by watching credit spreads, which would usually increase if economic vulnerabilities rise. Yet, we haven’t seen spreads budge, so corporate bonds (both investment grade and high yield) lose relative appeal given the risk of economic deterioration.”
While considering Australian bonds as looking “decent”, Morningstar said that its preference is for US Treasuries on a risk-adjusted basis.
Short-dated bonds are also viewed as appealing for investors who are cautious or have a short time horizon, given their ability to add income with appropriately lower duration risk.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.