UBS Global Wealth Management’s chief investment office has just released the UBS Year Ahead 2024 report, outlining what investors should expect as they enter, what it set out to be, “a new world.”
UBS Global Wealth Management's chief investment officer believes that the strength of the US economy in 2023 is likely to give way to slower, though still positive, growth in 2024, while UK and European growth should remain subdued. China will also enter a “new normal” of lower, but potentially higher quality growth.
The firm believes that central banks will start their interest rate cutting cycles next year. Politics will also have an outsized role in 2024, with the upcoming US elections, and ongoing geopolitical tensions and wars.
Mark Haefele, chief investment officer at UBS GWM, said that this environment speaks in favour of tilting equity allocations towards quality stocks, including in the technology sector, which can deliver earnings growth even against a backdrop of slowing global growth.
Paul Donovan, chief economist at UBS GWM, expects central banks to start cutting rates in 2024. He said that the rate cuts will start a little bit earlier in the UK, perhaps as early as May, as the UK is more interest-rate sensitive, and mid-year in the rest of Europe and the US. Nevertheless, markets are pricing in that the Bank of England is likely to cut rates after the European Central Bank and the Federal Reserve.
In UBS' view, government bond markets are overpricing the risk that high interest rates will represent the new normal, and it also expects yields to fall in 2024. This speaks in favour of limiting cash allocations and locking in yields in quality bonds.
Haefele also expects politics to have an outsized role in 2024. The US presidential election, the Israel-Hamas and Russia-Ukraine wars, and the continuing rivalry between the US and China could all have global market repercussions. And political decisions to engage in large and unfunded fiscal spending create both upside and downside investment risks for base case economic forecasts.
“Investors should prepare to hedge market risks. We see capital preservation strategies, macro hedge funds, oil, and gold as hedges to focus on in 2024,” Haefele said.
Looking at the decade ahead, he expects the effects of AI, China’s maturing economy, the energy transition, and high global debt levels to grow larger still. He thinks that AI will spur meaningful value creation across a range of sectors. For now, investors have focused on the likely beneficiaries from AI hardware and platforms, but the potential spillover into applications will reach far and wide.
Haefele believes that concerns about climate change and national security will drive a global transition towards decarbonisation. Achieving a complete transition to a carbon-zero economy is a complex undertaking. But significant investment in decarbonisation projects should mean high growth potential for solution providers in the space.
Government investment in technological, environmental, energy, and physical security – as well as ageing populations – means that debt levels are likely to rise. He believes that higher debt levels will contribute to higher volatility in fixed income, but also more opportunities for private investors to supply financing. These trends speak to the importance of building alternative assets into diversified portfolios for investors who are able to manage the specific risks associated with them.
Haefele expects positive returns for balanced portfolios in 2024; the firm’s scenario analysis suggests that multi-asset diversification should also prove effective at hedging risk scenarios. Over the longer term, he believes that investors who keep a diversified multi-asset portfolio – traditional or sustainable – as a “core” investment strategy are most likely to successfully protect and grow real wealth over time.
Themis Themistocleous, chief investment officer EMEA at UBS GWM, thinks slower growth will lead to lower interest rate expectations, and lower yields in 2024, making high-quality bonds an attractive investment opportunity.
He believes that it is an opportune time to add to high-quality bonds – specifically high grade (government) and investment grade. Current yields should provide attractive returns, with positive returns possible across a range of scenarios and particularly in downside economic scenarios.
UBS sees value in the one- to 10-year duration segment, and particularly the five-year duration point. It believes that this middle part of the yield curve offers an appealing combination of higher yields and greater stability than the longer end, as well as some sensitivity to falling interest rate expectations.
UBS is more cautious on longer-term bonds due to their greater sensitivity to technical factors, including currently high Treasury supply.
The firm sees select opportunities in riskier credit segments, including high yield credit and emerging market bonds. However, tighter lending standards, higher refinancing costs, and slower economic growth suggest higher default risks. Liquidity risk premiums may also rise as global money supply shrinks. As a result, UBS considers high yield spreads to be vulnerable to widening, relative to investment grade and high grade. Themistocleous also expects more upside for quality bonds in 2024 than equities.
UBS predicts that equity markets will rise broadly, but particularly like quality companies, including those in the technology sector, with the potential to grow earnings against a backdrop of less robust economic activity. In particular, it favours the AI, healthcare and climate change sectors. Regionally, UBS likes emerging market equities and views UK equities as least preferred.
Meanwhile, Dominic Schnider, head global FX and commodity at UBS GWM, expects the dollar to remain stable going into the first quarter of 2024, and then to weaken as US growth falls. He recommends making use of the Australian dollar in 2024 when the US dollar declines.