Are you guessing at your 2024 asset allocation

Over the December holidays, this writer spent countless hours trawling LinkedIn posts in search of ideas for his January 2024 FAnews newsletter contributions. One of the thought-provoking snippets came courtesy a LinkedIn post by France-based CFP®, Michael Yuille, who opened his comment with the line “nobody has a crystal ball; even Wall Street firms guess wrong most of the time”.

Asset managers: guessing wrong since forever

Yuille compared the S&P 500 2023 predictions made by analysts at household asset management brands like Barclays; Goldman Sachs; Morgan Stanley; and UBS with the full-year outcome. As it turns out, these experts, all of whom are wholly immersed in the world of stock market investing, were far off the mark. Their estimates for the S&P 500 2023 close ranged from 3 675 to 4 000 points compared to the eventual 4760 points, for an impressive 23% gain. Of course, had they guessed +23% at the start of the year, these gurus risked being laughed off the stage. 

The key message ‘tagged’ to the aforementioned LinkedIn post was for you and your clients to ignore speculation, forget about market noise and stick to those long-term financial plans. It is excellent advice but hard to follow given the pressure that clients place on you, their financial advisers, to offer up the inside track on the next big return driver. Everyone wants to position their investment portfolios in the sweet spot of asset class returns; and everyone wants to be ‘all in’ on the company most likely to emulate the 2.4x 12-month return delivered by US-based chipmaker, Nvidia (NASDAQ: NVDA). This explains why 2024 market outlook presentations prove such fruitful hunting grounds for investment-focused writers. 

Going against the advice just offered, this writer will share some asset allocation nuggets from the Rezco Asset Management Global and Local Markets 2024 Outlook webinar that was presented by the brand’s CIO, Rob Spanjaard and CEO, Simon Sylvester late last year. The CIO kicked off his commentary by noting a sea change in global financial markets that had started early in the prior year. “This was one of the most important turning points in the last 10-12 years,” he said, highlighting the radical change from an investment environment in which inflation was seen as transitory to one in which high inflation is being accepted as the base case. 

High interest rates make a mockery of TINA

In the decade pre-2022 global financial markets were dominated by quantitative easing. Central banks across Europe and the United States seized upon the low interest rate environment to print money. And governments found that they could increase their spending without worrying too much about the cost of servicing debt. “Central banks were printing money and buying government bonds,” Spanjaard explained. The pro-equity acronym that emerged during this low interest rate period was TINA, there is no alternative, further emphasised by the phrase ‘cash is trash’ as depositors in some European banks were earning negative yields on cash. 

The dramatic financial market ‘switch’ took place early-January 2022 as the US Federal Reserve cottoned on that inflation was real. In the ensuing market upheaval, bonds briefly exhibited higher volatility than equities. “This was a sign of how the world was changing in response to the new [high inflation] regime [in contrast to] the world of free money,” Spanjaard said. He advocated for an active approach to asset management entering 2024 before sharing the four overarching US-centric scenarios that the asset manager would rely on to inform its global asset class decision making over the coming months. 

The scenarios and probability of each occurring included no landing (10%); soft landing (40%); normal recession (45%); and hard landing (5%). Rezco’s view is that the no landing scenario was likely ‘priced in’ to markets entering December 2023, and that something would have to ‘break’ for the hard landing scenario to come into play. The following explainers are reported from slide 12 of the webinar presentation pack. 

• No landing: The US Federal Reserve and central bank do enough to cool inflation. The market is pricing for an economy that can operate with a steep negative-sloping yield curve; strong economic data; strong consumers; rising corporate earnings; and high wage inflation offset by overall declining inflation. US corporate earnings would likely grow by 5-15% under this scenario.
• Soft landing: US inflation falls to target while wages decelerate. Corporates reduce their spending; but profits remain stable and corporate balance sheets are strengthened. US corporate earnings grow by 0-5%.
• Normal recession: The Fed and central bank need recession to break inflation; unemployment rises to curb wage increases; core inflation is stickier and requires a recession to cool demand. Under this scenario, US corporate earnings would contract by 10-20%.
• Hard landing: Something breaks due to the impact of rapidly increased interest rates; or a geopolitical shock occurs; or inflation remains sticky due to the fed doing too little to tame it; or bond rates ‘blow out’. In this doomsday scenario, US corporate earnings would plummet by 25-45%. 

The risk in summing four diverse scenarios

On a simplistic summing of the various probabilities, and assuming that market ratings remained constant, Rezco suggested that the MSCI World index could contract by 3.6% over 2024. This index offers a proxy for global equity returns in US dollars. “Compared to the beginning of the year, the probabilities have shifted more towards the ‘no landing’ or ‘soft landing’ scenarios and the tail risks have decreased somewhat; but even with a soft landing we are not seeing a lot of upside [for global equities],” mused Sylvester, adding that the core view remained for a normal recession. PS, at this point, readers may wish to refer back to the earlier observations re the accuracy of asset manager forecasts. 

Both Spanjaard and Sylvester reminded the audience that there was no such thing as the average of four divergent scenarios, and that by the end of 2024 one or other of the four would have likely played out. However, they opined that cash would ‘beat’ equities in the event US corporate earnings growth came in at 5% or worse. According to Sylvester, the point of the scenario plus probability number crunching was to determine whether it was a good time for investors to take on more risk in equities or not. “We are always on the hunt for opportunities, but you must coincide your entry into those opportunities with when the risk-return outlook is in your favour,” he said. 

SA equities to splutter along through 2024

The short-term outlook for South African equities is rather subdued. “Our core scenario is that we remain stuck in a low growth cycle,” Sylvester said, before singling out cadre deployment and mismanagement as among the myriad constraints affecting the domestic economy. 

“South African equities are not cheap relative to what you can earn on the 10-year government bond, especially given the current low growth environment,” Spanjaard contended. He pointed out that a soft landing in the US was particularly bad for emerging market shares. And to make matters worse, South Africa faces a potential significant risk event in the form of the 2024 National Elections, with a real possibility of the African National Congress losing its outright majority. 

For some good news, the South African Reserve Bank (SARB) was commended for “the brilliant job” it does in managing inflation. “The monetary policy cycle in South Africa is quite recessionary [entering 2024],” Sylvester said. He noted that the current high interest rate environment presented a massive headwind for local businesses and consumers, meaning that South Africa might enter recession regardless of whether China or Europe do so first. Another major risk is that the SARB is pressured into making politically expedient rather than economically correct decisions, contributing to a mispricing of SA bonds. 

Stay patient, you can afford to wait it out…

Overall, the current 3% real return on offer from government bonds makes it possible for local investors to wait patiently in the less risky part of the market. “We live in a world of instant returns and instant gratification; it is time to be patient, and interest rates being high, you can afford to wait,” Spanjaard concluded. 

Writer’s thoughts:

The New Year is awash with asset class return predictions, making it near impossible to know which house view to follow. Do you spend hours reading 2024 outlook reports to get your clients’ asset allocations spot on, or do you trust in your preferred asset manager or DFM to deliver benchmark returns per mandate? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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