In this new regime, investors need to be nimble

In an era of higher inflation and reduced monetary support, investors need to be more agile to take advantage of market opportunities, says Lenny McLoughlin of Irish Life Investment Managers.

McLoughlin said market conditions are vastly different than they were following the great recession of 2008, when central bank actions boosted asset classes across the world.

“You could close your eyes and buy nearly anything, and most markets rose,” he said. “We’re unlikely to see that level of monetary support and liquidity going forward. We think now investors need to be a lot more discerning, a lot more flexible, a lot more nimble — and be quick at identifying opportunities that present themselves in the market.”

He said investment strategies need to reflect new fundamentals.

“Even if we see inflation fall next year, it is likely to settle at higher levels. So it does provide a different playbook for investors,” he said.

McLoughlin said geopolitics will continue to add a level of uncertainty to markets in 2024. Investors need to consider the broader ramification of a wide range of potential complications, including deglobalization, war in Europe and the Middle East, and rising tensions between China and Taiwan in the wake of the Taiwanese presidential election in January.

“All of those things need to be watched and considered looking into 2024,” he said.

Additionally, the upcoming U.S. election could start affecting markets starting mid-year.

“Typically what we see is that the U.S. equity market outperforms the long-term average by about 2% to 3% in an election year when a recession is avoided. And we believe that will be the case next year as well,” he said.

He said while markets are unlikely to give the election much consideration until nominations for both parties are confirmed, the Federal Reserve Board will likely maintain its “current dovish tilt” in an effort to remain as inconspicuous as possible.

“They won’t want to interfere with the economy too much or with the whole political process,” he said.

Despite all the uncertainties, McLoughlin said he and his Ireland-based team are “generally positive” on equities for the year ahead.

“With [the] top line remaining positive on the back of this positive growth outlook into next year, we think you’re likely to see earnings growth of around 11% or 11.5% for global equities as opposed to only 0.5% for this year,” he said.

As for bonds, with inflation falling and an expected halt in rate hikes by the Fed, he expects to see bond yields — which have already started falling from 16-year highs — fall further.

“In nine of the last 10 occasions when the Fed fund rates has peaked, we’ve seen [10-year] bond yields … fall by, on average, 110 basis points in the following 12 months,” he said. “We think something similar will happen this time around.”

Looking further afield, McLoughlin said Japan’s economy has done extremely well in 2023, up about 29% in local currency terms, on the back of still relatively loose monetary policy, improving governance and healthy returns on equity. While a weak yen has been good for Japanese exporters, the returns are essentially halved in U.S.-dollar terms.

The rest of the Pacific basin has not fared as well. It is down about 1% this year.

“That is really been driven by Hong Kong [stock market], which is down by about 11% because of the difficulties you’ve seen in China post the sort of reopening,” he said. “Also the difficulties we’ve seen in the property sector in China have acted as a drag on the Hong Kong market in general.”

He pointed out that the U.K. has also lagged the U.S., driven by a strained energy sector throughout 2023.

“We’ve seen oil prices and energy prices come off,” he said. “And also, the U.K. market tends to be quite defensive, and defensives have underperformed this year.”

McLoughlin said he expects many of the patterns and trends of 2023 to continue into 2024.

“We think cyclicals and industrials can continue to do relatively well next year. And again, using a barbell approach to provide some protection if you were to see some unexpected risk-off environment, we think health-care pharmaceutical stocks can continue to do well,” he said. “We think they provide good opportunities in the short term and provide good growth characteristics, which should actually underpin them over the course of 2024.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.