While Schroders’ chief executive officer and chief investment officer, Simon Doyle, doesn’t expect 2024 to be an easy year for investors given the expectation that central banks will likely remain tough on inflation, he believes the opportunity to build a diversified portfolio of assets is the best it has been in years.
“Nothing suggests 2024 will be an easy year. It is set to be messy and with plenty of surprises,” Mr Doyle said.
“That said, the opportunity to build a diversified portfolio of assets is as good as it has been in some time. Cash investments with yields around 5 per cent suggest the opportunity cost of waiting for markets to truly dislocate is low; 2024 will provide lots of opportunities to deploy this cash.”
For Mr Doyle, the greater volatility in asset performance comes with a set of opportunities – including a predicted better-than-expected performance by domestic equities alongside a record run for investment grade bonds.
“With liquidity less abundant, investment performance will depend on fundamentals, meaning asset quality and price will be important – value and risk will likely matter again.
“Active security selection and asset allocation will likely be key drivers of alpha and risk management. Passive investment approaches, which thrived in a free money environment, may be tested, particularly if a recession unfolds, which will pressure company earnings. Quality will matter in this environment,” Mr Doyle said.
His colleague, the head of multi-assets, Sebastian Mullins reiterated that “more volatility offers opportunity to investors to capitalise on the dispersion of investment returns”.
“Investors should consider being active in security selection in both equities and credit. When money was free, loss-making companies could survive on the promise of future earnings. With the higher cost of capital today, companies will be forced to repay debts sooner. This means identifying companies that can defend their moat and make pricing adjustments to defend their margins,” Mr Mullins said.
Schroders modelling suggests that Australian equities could surprise on the upside in 2024, and potentially catch up with the significantly strong-performing US markets.
“If policymakers are able to achieve a soft landing, there is also scope for other markets to catch up with the US,” said Mr Mullins.
“Australia looks attractive given its relatively cheap valuation. Companies with inflation-linked earnings are likely to prosper. Australia also benefits from its commodity linkage, particularly in commodities that will be required in the technology space and energy transition.”
Namely, demographics and decarbonisation are tipped to be vital drivers of future investment returns from Australian equities.
Schroders head of Australian equities, Martin Conlon, explained that the global perspective on the energy transition is inextricably linked to mining, a sector on which Schroders remains positive.
“Metals demand should be strong unless appetite for decarbonisation spend collapses. Even then, spend, which should arguably be diverted to adaptation and resilience spend, should still be positive for commodities,” he said.
But unlike materials, Mr Conlon said Schroders has skewed away from the financial sector given tailwinds of decades of financial excess and cheap money have turned into headwinds for the finance sector.
“Exposure to the real economy through selective resource, energy, and materials companies sits alongside longer duration industrial companies across a broad range of sectors including supermarkets, logistics, telecommunications, and chemicals,” said Mr Conlon.
“We are seeking reasonable valuation levels based on earnings expectations in normal conditions.”
On the fixed-income front, Schroders predicted that investment grade bonds will offer the best returns seen in over a decade.
“We believe high quality fixed income currently offers an excellent entry point – offering attractive yields, with limited downside and potentially material upside insurance for portfolios,” said the head of fixed income at Schroders Australia, Stuart Dear.
“We have modelled several cycle scenarios to estimate the impacts on our portfolios, which reveals that even in the cycle scenarios that are more adverse for returns, elevated starting yields provide a strong offset to price moves,” Mr Dear concluded.
