2024 investment trends and forecasts
For the first time in several decades, high interest rates, high oil prices, and difficult credit conditions have occurred simultaneously. What assets should investors focus on?
We have recently summarized the third quarter's results and found many interesting patterns. For most of the year, we have been focusing on the macroeconomic component of the global interest rate strategy of central banks and especially on the possible impact of their policies on financial markets. For the first time in several decades, high interest rates, high oil prices, and tight credit conditions have occurred simultaneously.
After the crisis of regional banks, global markets began to grow rapidly. In the United States, it was driven by a strong labor market, in Europe by the growth of certain sectors (luxury, travel), and in China by the thesis of economic opening. All this was accompanied by a reduction in volatility and allowed large market participants (pension funds, systemic hedge funds) to record growth results and take a defensive position in the market by the end of the year.
How do these trends affect investment portfolios? Simply put: what assets does it make sense for an investor to focus on? We recommend focusing on the stock market, debt instruments, and commodities. Let's take a closer look at each category.
Stock markets
The positive total return of the stock market in the first three quarters prompts us to take a closer look at which companies have formed a leadership cluster and what characteristics they have. The absolute return of tens of percent for seven or eight large-cap companies (fueled by AI) hides a relatively weak structural growth of the S&P 500. For example, the share of companies trading above their average is less than 15%. In the index structure itself, there is not a single company that traded positively every month of the year.
In general, the US economy is balancing on a precipice, as weaker growth could lead to a recession, while more robust growth would restore inflation and Fed activity. In such circumstances, companies from sectors that do not miss possible rallies but are more resilient to the market and viable macro risks look attractive. First of all, these are companies from the healthcare, financials, consumer staples, and industrial sectors.
The main criteria for selecting companies include the following:
● Dividend yield higher than the S&P 500
● Low beta (a measure of market risk for a security or portfolio of securities)
● High coverage of interest payments
● Stable net cash flow generation
● Low debt burden.
The debt market may become a safe haven for investors amid a pause in monetary tightening and a correction in the stock market. Rising yields again marked the debt market. One of the main reasons for such dynamics in the third quarter is the US economy, which is stable in certain categories and, at the same time, has a pro-cyclical fiscal policy.
There are only so many alternatives other than bonds for capital flows from the equity market for hedge funds, pension funds, and other large market participants.
The prolonged and intense cycles of rising interest rates globally have pushed yields on medium-term debt securities higher than on short-term ones. However, as we approach the terminal interest rate, this trend is reversing and raising reinvestment risks. More and more investors are increasing the duration of their portfolios to capture higher yields on debt securities.
Commodity assets
Rising energy prices and demand for industrial metals are attracting the attention of investors looking for alternative sources of return. The strong dollar in the third quarter did not help commodity indices. Still, the future prospects for the currency make it possible to return to commodity markets with even more enthusiasm. The most attractive assets include oil and oil products, copper, and gold.
Oil and industrial metals (copper, aluminum, etc.) are gradually rising amid declining inventories. From a structural perspective, gold and platinum group metals remain in demand from the green energy and automotive sectors.
Gold has excellent strategic growth prospects due to central banks building up reserves, rising geopolitical tensions, and demand for universal assets that serve as alternatives to the dollar and US bonds.
Recently, global geopolitical tensions have favored the universal exchange asset, and the share of gold in reserves has begun to grow (currently around 17%). Political polarization can largely explain this, where some central banks have started to buy gold instead of US public debt.
International gold reserves reached a record high of 38.7 thousand tons, exceeding the level of 38.3 thousand in 1965, when the share of gold in global gold reserves was 58%.
Oil. After a significant decline from mid-2022 to mid-2023 (from $120 to $65), oil prices have recovered to $90. The energy sector has outperformed even the fastest-growing stock indices, including the S&P500 and NASDAQ, in terms of expansion this year. One of the main reasons supporting oil prices is the OPEC+ production cuts (a 1.15 million barrel/day production cut announced in April).
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According to the IMF, Saudi Arabia will be able to balance the current budget at an average oil price of $80. From a global perspective, oil demand remains inelastic, high, and stable, so any reduction in production has a sharp impact on the price of oil. While US producers are increasing their output, the cost of production has fallen by 60% since the peak of 2014. This allows companies in the sector to distribute dividends to investors. Oil inventories are expected to remain low until the end of the year, which will support prices.
Industrial metals
According to the IEA, by the end of 2023, about 18% of cars sold will be electric vehicles (by 2030, this figure will increase to at least 35%). Strategically, this transition means a structural shift in demand from direct consumption of petroleum products to metals needed for car production. This applies not only to rare earth metals required for battery production but also to industrial metals. While the slowdown in manufacturing activity in China (including in the engineering sector and stagnant real estate) is reducing demand, global copper stocks are at multi-year lows, and production growth is relatively slow and inert. From an investment perspective, copper is one of the most attractive assets in the long term.
We see the following as the main risks for the coming periods:
• The fragility of the global economy remains unchanged. As a result, this may create volatility in the stock markets in the next 2-3 quarters.
• Further reduction of liquidity in the market.
• Geopolitical crisis, emergence of new armed conflicts and wars.
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