The world is likely to be characterised by higher inflation and interest rates and geopolitical risk in 2024. Investment models relying on static asset allocation and passive investment management will no longer work like they did over the past decade or more. Therefore, multi-asset investors could be better served using a tactical investment approach.
Volatility remained elevated during 2023. Conflict flared in the Middle East, in addition to the ongoing Russia/Ukraine war. In capital markets, bond yields moved higher before falling back on the expectation central banks would cut rates in 2024. In October yields on 10-year Treasuries broached 5% – the highest level since 2007 – before falling back to around 3.9% at the close of the year1.
This sentiment on monetary policy also drove equity markets higher at the end the year, led by a handful of mega-cap tech stocks. The S&P 500 index ended the year up about 24% thanks in large part to the so-called magnificent seven, buoyed by positive sentiment around artificial intelligence (AI) and semiconductors.
More volatility in 2024?
Macroeconomic uncertainty is likely to continue in the year ahead. Interest rates appear to have peaked. Inflation appears broadly on a downward trend but is at elevated levels relative to recent history. Geopolitical tension continues.
The most pertinent question is whether the US can engineer a soft landing by bringing inflation down to target. Labour market figures will be a key indicator to monitor this. It is likely a nervous US Federal Reserve will want to see labour markets in balance, meaning restrictive monetary policy could remain for most of the year.
Elsewhere, this year is set to be one of the biggest for elections in history as voters in at least 64 countries (49% of the global population) are expected to head to the polls2. The uncertainty of outcomes in these elections could also heighten market volatility.
Active is key
During bouts of volatility, it is vital investments keep pace with inflation and remain resilient. This is especially pertinent to individuals at or approaching retirement. We believe the best way to address volatility in the current macro environment is with active management, supported by thematic research.
Active management can fare well during volatile times. In 2022, volatility dominated markets thanks to Russia’s invasion of Ukraine and central banks raising interest rates to cool rising inflation. But 2022 was the first year since 2009 that most active asset managers of equity mutual funds were able to outperform the S&P 500 index3.
Market conditions such as those in 2022 reduce liquidity and increase dispersion between stocks and sectors, creating a broader opportunity set for active managers. In the year ahead market liquidity is likely to be tight because of quantitative tightening and rates remaining higher. We would argue in this environment passive strategies may struggle to deliver positive real returns.
Tactical
But we think it is necessary to take this further than just active management. The current macro backdrop will affect companies, countries and sectors in differing ways requiring a nuanced and dynamic approach to asset allocation.
The Newton FutureLegacy strategy uses a tactical derivative overlay to react in a time appropriate manner to market and macro events. The positions are determined by Newton’s Tactical Asset Allocation Group (TAAG) which brings together asset allocators from across Newton to monitor a host of macro and market indicators. The group can use futures, forwards, and physical securities to navigate the environment tactically.
There are multiple sources of uncertainty awaiting us in 2024 and with that, comes volatility. That is why we believe tactical asset allocation will be so important.
The value of investments can fall. Investors may not get back the amount invested.
