J.P. Morgan Private Bank released its 2024 Global Investments Outlook, After the Rate Reset: Investing Reconfigured, which defines five important considerations for investors as they navigate the dynamics of today’s new interest rate environment.
“Markets have entered an entirely new interest rate regime,” said Grace Peters, Global Head of Investment Strategy at J.P. Morgan Private Bank. “Three years ago, nearly 30% of all global government debt traded with a negative yield. It seemed the era of super-low interest rates might never end, but it did.”
“As we head into a new year, it’s time for investors to think about their investing goals and how they must adapt to – and even capitalize on – this market environment,” said Clay Erwin, Global Head of Investments Sales & Trading at J.P. Morgan Private Bank. “The rise in global bond yields is not just historic—it may mark a once in a generation entry point for investors that might not be available a year from now.”
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To harness the new dynamics of a 5% rate world, J.P. Morgan Private Bank’s 2024 Investment Outlook explores five important themes.
Inflation will likely settle – you should still hedge against it.
“Compared to this time last year, the inflationary outlook is far less bleak. However, we think that 2% mandate will become the inflation floor, not the ceiling. Therefore, investors still need to prepare for a higher inflation world, just not as high as we’ve experienced recently,” said Erwin.
To grapple with the prospect of more meaningful inflation in 2024 and beyond, investors might first look to equities. Public companies may continue to maintain both pricing power and their margins.
Moreover, while investors used bonds to help insulate portfolios from slower growth in the previous cycle, the 2024 Outlook notes that investors should consider an allocation to real assets as an inflation hedge for the cycle ahead.
The cash conundrum: the benefits and risks of holding too much.
Low volatility and 5% yields on cash have been a magnet for J.P. Morgan Private Bank’s clients, who are holding significantly more cash than they did two years ago, having added at least $120 billion more in more in short term money market funds and treasury bills. This trend is global, but particularly powerful in the U.S. where clients have over twice the allocation to short-term treasuries and money markets as their peers outside the U.S.
“It feels good to hold cash when rates are high and other markets are this volatile,” said Jacob Manoukian, U.S. Head of Investment Strategy at J.P. Morgan Private Bank. “Cash works best relative to stocks and bonds in periods when interest rates are rising quickly, and investors question the durability of corporate earnings growth. But we think this is as good as it gets for cash.”
Bonds are competitive with stocks – adjust the mix according to your ambitions.
While there has been a painful stretch for bondholders this year, the new rate regime represents a reset in bond market pricing, and core bonds may now be poised to deliver strong forward-looking returns. Relative to stocks, bonds haven’t looked this attractive since before the Global Financial Crisis. Despite this, four out of every five J.P. Morgan Private Bank clients have not materially increased their allocation to fixed income over the last two years.
“We look to bonds to provide stability and income. Given the recent increase in yields, from our view bonds are now well positioned to deliver on both fronts,” added Manoukian.
With AI momentum, equities seem to be on the march to new highs.
Equities offer the potential for meaningful gains in 2024. Even as economic growth slows amid higher rates, large-cap equity earnings growth should accelerate and may propel stock markets higher over the next year.
“We believe the U.S. large-cap corporate sector has gone through an earnings recession already, with eight of the eleven major sectors in the S&P 500 having reported negative earnings growth for two or more consecutive quarters over the last two years. These companies have emerged leaner and resilient to potential challenges that 2024 could present,” noted Christopher Baggini, Global Head of Equity Strategy at J.P. Morgan Private Bank.
Investors don’t seem to have missed the valuation opportunity. While the S&P 500 trades at an above average valuation, there is a substantial discount to be found in U.S. mid and small-caps as well as European and emerging market stocks. Additionally, the promise of artificial intelligence and the potential upside in the stocks of drug makers with a growing share of the weight loss market also provide an attractive opportunity for investors looking into next year.
On regional opportunities, Alex Wolf, Asia Head of Investment Strategy at J.P. Morgan Private Bank, considers Indian equities a bright spot for 2024.
“In India, corporate earnings have kept pace with GDP growth – a rarity in emerging economies. Indian company profits, and thus stock returns, have tended to grow in line with nominal GDP,” notes Wolf. “Data over the past twenty years show that India has one of the closest relationships between economic growth and market returns.”
Pockets of credit stress loom, but they will likely be limited.
The next year could see stress in certain sectors of the credit complex. For example, commercial real estate loans, leveraged loans, and some areas of consumer credit – like autos and credit card – and high yield corporate credit could be vulnerable.
“An inescapable fact of the business cycle is that higher interest rates make credit harder to come by. We think these stresses will be manageable, and not enough to cause a recession in 2024,” added Peters.
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