Out with the old, in with the new

This article was written by Thomas Becket and originally published by CGWM. 

Why we’ve resolved to keep talking about fixed income investments in 2024

As we approach the end of the year it is a time to reflect on our investment views for the passing year and consider our outlook for the year ahead.

Making predictions over the last twenty years has proved challenging, particularly in the last decade, which we have aptly termed the ‘Turbulent Twenties’. A decade marked by a global pandemic, recessions, growth spurts, geopolitical conflicts, inflationary panics, and volatility in interest rates, collectively contributing to a volatile landscape.

With this turbulence in mind, let’s take a look at the past year and our early expectations for another uncertain, but hopefully rewarding, year in 2024.

What was the main investment discussion topic of 2023?

Before we delve deep into our forecasts for the year ahead, one of the main topics for discussion in 2023 was whether we had seen the worst from fixed interest (bond) markets and whether the years ahead would bring positive returns. Let’s be totally honest, this was hardly the most sweeping of statements after 2022, which was just about the worst year on record for fixed interest markets. Fortunately, 2023 turned out to be much better for bonds, particularly if one was successful in fixed interest positioning, and there is now a distinct possibility of recovery from the misery of 2022.

Notably, the returns from a range of different fixed interest markets in 2023 were varied, with some specific bond markets still stuttering and barely clambering into positive territory, while others performed extremely well.

In simple terms, the behaviour of various markets and instruments suited our investment positioning and strengthened our resolve to focus on active investment management within fixed interest markets. Our key aims for most of 2023 were to limit the amount of interest rate sensitivity within our portfolios, and to focus predominantly on specific areas of corporate and consumer credit.

The worst performing assets in 2023 were core government bonds (longer duration UK gilts being an obvious example), while the strongest returns came from credit sectors such as asset-backed securities and speculative corporate bonds. The gap in returns between core indices measuring the worst and the strongest assets reached as much as 10%.

What will happen to inflation and interest rate pressures in 2024?

In recent times, we have seen a broad-based rally in all fixed interest markets, as some of the negative factors of the last two years have started to reverse or at least subside. Inflationary pressures are undoubtedly retreating all around the world, and we expect this to continue for at least the first six months of 2024. As we have said before, inflation affects fixed interest markets in the same way that kryptonite afflicts Superman – so it’s fair to assume that just as inflation wreaked havoc on bond markets in 2022, disinflationary tendencies could reap rewards for investors. In fact, this is what we have seen in the last few months of 2023.

When will interest rates begin to subside?

Should inflationary pressures dissipate further, the pressure will be off central bankers to maintain interest rates in currently ‘restrictive’ territory. Most commentators expect that the UK and US central banks will be discussing interest rate cuts by early summer 2024. We don’t disagree with this view, but we would urge you to remain open-minded about this and all other factors, given the limitations of predicting anything in the post-COVID-19 era.

Interest rate cuts could well act as a spur to all fixed interest markets, including government bonds, which lagged materially in 2023. As the year progressed, we gradually increased the interest rate sensitivity of our investment strategies, based on our belief that the balance of remaining risks had been offset by higher prospective returns (increased yields in many cases). We also recognised that interest rate cuts could boost certain investments’ value and help portfolio returns.

Which two factors could create investor disappointment in 2024?

Two factors could create unrest for the world and disappointment for investors in 2024. The first is the much talked about fact that this year brings elections across a large number of key countries, representing over 50% of the world’s population. In the short run, volatility in the borrowing costs for changing governments could destabilise fixed interest markets.

The other key risk we need to monitor is economic growth. Inflationary pressures are reducing, and interest rates will probably be lowered because economic activity is slowing. The question, as with both inflation and interest rates, is how far it will fall. We will only be able to answer this with certainty as we make it through the early months of 2024, but our basic expectation is slow growth and no recession. We will keep a watchful eye on proceedings and update you in our next Investment Outlook in February.

Conclusion

In simple terms, 2024 could be a year of deceleration, as inflation, interest rates and economic growth continue their recent moderations. However, it could also be a year of accelerations; most likely of fixed interest returns.

At Canaccord Genuity Wealth Management, we have been running fixed income portfolios for many years. Our fixed income investment team has decades of collective experience investing in these markets, and our global and flexible approach enables our clients to take advantage of fixed income investments from many different markets around the world.

If you have any questions about the current market and economic environment or about your investments, please get in touch with us or email: enquiries@adamandcompany.co.uk.

For further information on any of the terms used in this article please see our glossary of investment terms.

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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

This is not a recommendation to invest or disinvest in any of the companies, themes or sectors mentioned. They are included for illustrative purposes only.

The information contained herein is based on materials and sources deemed to be reliable; however, Adam & Company makes no representation or warranty, either express or implied, to the accuracy, completeness or reliability of this information. Adam & Company is not liable for the content and accuracy of the opinions and information provided by external contributors. All stated opinions and estimates in this article are subject to change without notice and Adam & Company is under no obligation to update the information.