Markets have also had to contend with the continuing war in Ukraine and renewed conflict in the Middle East, which has pushed up commodity prices.
Many analysts are expecting more of the same in 2024.
“Geopolitical tensions and economic fragmentation will linger as we enter 2024 with two major conflicts,” says Geroge Lagarias, chief economist at Mazar.
“Additionally, the US presidential election cycle could contribute to further tensions between Washington and Beijing.”
He predicts that interest rates won’t be cut until the second half of 2024, after which there is a better chance of an equity rally.
The continuing uncertainty over interest rates and the direction of inflation, as well as the prospect of political change, can make it hard to know how and where to invest.
We asked analysts what they think will be the key investment trends of 2024.
Go defensive on shares
The consensus this time last year was that inflation and interest rates would peak in early 2023 but Tom Stevenson, investment director at Fidelity International, says persistent inflation, higher for longer interest rates and a more resilient economy blindsided many investors.
Fidelity International believes a mild recession followed by a soft landing is the most likely scenario for 2024.
“In the base case of a mild recession, we would expect current earnings forecasts to be too optimistic and defensive equity sectors will therefore be more attractive than cyclical sectors.
“Consumer staples, utilities and healthcare could do relatively well.
Kasim Zafar, chief investment officer at EQ Investors, says the corporate earnings profile and financial health of high-quality companies looks attractive for 2024.
“Recent share price weakness has allowed us to increase our exposure to these traditionally defensive companies,” he says.
“Given they are usually priced at a 10-20% premium to the market overall, we see their current valuations in line with the market as very attractive.”
Zafar says small and medium sized companies have become cheap relative to large companies.
“Many of these companies still need to adjust to the higher interest rate environment and so it’s probably still too soon to invest,” he adds.
“This will very likely be a key source of outperformance when we get closer to central banks signalling a loosening of monetary policy. “
“There are so many stats out there showing how cheap the UK is that I simply can’t ignore it,” says Ben Yearsley, investment director at Shore Financial Planning.
“The problem is what the catalyst will be: rate cuts, M&A, or simply price?
“The UK is cheap and UK small cap is even cheaper. Small cap growth tends to prosper in slower growth tougher environments, which 2024 could very well be. If there is the odd rate cut and some takeover activity it could be a good year for these.”
Schroders is backing the “megatrends” of decarbonisation, demographics and deglobalisation next year, known as the 3Ds.
This means looking beyond strong markets such as the US and to look at unloved countries such as Japan and the UK.
It says solar and carbon capture are central to the energy transition theme, while automation and artificial intelligence (AI) is important for addressing issues such as changing demographics and ageing societies.
“Investors should not automatically continue with what has worked in the past,” says Nils Rode, chief investment officer for private assets at Schroders Capital.
“Instead, strategies and investments should be evaluated for their suitability for the new world we are entering. In conclusion, this is a time to be forward-looking and thoughtful.
“The 3D Reset, the AI revolution, and the private markets slowdown and higher global interest rates mark a new era for private assets investment. By focusing on long-term trends, diversifying portfolios, and rethinking past strategies, investors can navigate this new era successfully.”
A comeback for bonds?
Bonds have enjoyed a bit of a resurgence during 2023 amid a flight to safety by investors.
Yearsley suggests that with investment grade bonds yielding 6%, it only takes a small cut in rates next year to propel returns to double digit.
“What isn’t to like about that?” he says.
“If there is no rate cut, then you’re being paid 6% to wait. Obviously if rates continue to increase then capital values fall, but, with inflation seemingly back towards more normal levels it’s felt for a while that rate hikes were done therefore bonds look good value. “
Stevenson adds that a soft landing economic scenario could also be good for bonds.
“It would set the scene for lower interest rates while keeping default rates manageable for corporate bond investors,” he says.
Unloved investment trusts
Similar to UK stocks, investment trusts are trading at record discounts to net asset value.
Some of the largest discounts are among private equity and infrastructure-focused investment trusts.
“It’s been an annus horribilis for lots of these alternative income focused trusts,” adds Yearsley.
“Poor governance, mismatched funding, and some ill thought-out business plans has helped push the most popular sectors of 2017-2022 towards the least popular. High premiums to big discounts. There is good selective value – though again I’m not sure what the catalyst will be as currently there are no marginal buyers.”
Although infrastructure assets have underperformed this year, Zafar says the sector this still is one of EQ Investors’ highest areas of conviction.
“In the investment trust space, share prices are at the cheapest levels since the financial crisis which gives a substantial cushion for any potential downward adjustments to asset values,” he says.
“However, we keenly note the value of similar assets have been bought and sold in private transactions at premiums to current market pricing. “
Go for gold?
The gold price has hit an all-time high in recent weeks amid Middle East tension and as investors become more confident of interest rate cuts.
It is unclear how much further the yellow metal will rise, especially if markets are more calm in 2024.
Analysts are expecting a soft landing in the US, which isn’t particularly attractive for gold.
But the World Gold Council highlights that this isn’t guaranteed.
“Every cycle is different,” says Juan Carlos Artigas, global head of research at the WGC.
“This time around, heightened geopolitical tensions in a key election year for many major economies, combined with continued central bank buying could provide additional support for gold,” he says.
“Further, the likelihood of the Fed steering the US economy to a safe landing with interest rates above five percent is by no means certain. And a global recession is still on the cards.
“This should encourage many investors to hold effective hedges, such as gold, in their portfolios.”