Wealthify doesn't support your browser
We're showing you this message because we've detected that you're using an unsupported browser which could prevent you from accessing certain features. An update is not required, but it is strongly recommended to improve your browsing experience. Find out more about which browsers we support
WEALTHIFY’S INVESTMENT OUTLOOK Q1 2024
DIVERSIFICATION REMAINS KEY IN UNCERTAIN TIMES
A patient and diversified approach is key to increasing potential sources of return, while helping to protect capital. Inflation is encouragingly coming down, but risks still remain.
Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.
Please remember that past performance is not a reliable indicator of your future results.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you invested.
Developed market economies – including the US – are beginning to show signs of slowing activity. And, despite resilient economic data, consumer spending and labour markets in the major economies have also started to show some cracks.
It’s also important to remember that economic data is inherently backward looking sometimes, with material lags and data revisions.
We remain conscious of this when forming our forward-looking view, which we think could be more vulnerable in the present than data indicates. We continue to remain cautious about the outlook for riskier asset classes (such as shares), perhaps even more so having seen the prices of selected shares continue to rise in recent months.
It’s been well documented lately that a particularly large portion of global shares’ returns have been driven by the Magnificent 7 stocks in the US share market: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
These shares continue to increase in valuation, which could be a potential risk, as we saw in 2022. Our diverse strategy means Plans have benefited from these shares, with our positioning set to benefit from other areas of the market that have gained less attention.
We continue to see value in UK shares, given the poor investor sentiment which is keeping prices attractive. Within shares more generally, our Plans lean increasingly towards more defensive (developed) share markets, as the impacts of tighter financial conditions begin to wear down consumers, the economy, and – eventually – company earnings and share prices.
Due to the falling outlook for growth and corporate earnings, we continue to favour government bonds over shares. Quite simply, we think the current pricing of shares and bonds makes the latter a strong choice on a risk-adjusted basis (how much risk is involved with creating a certain return).
In the event of a recession , we see government bonds as likely to outperform, providing a strong hedge (reducing the risk of loss) as rates will need to be lowered dramatically, which will lead to an increase in the value of bonds.
History indicates that high interest rates curb inflation by lowering economic activity. Inflation is a phenomenon often referred to as too much money chasing too few goods or services. To slow inflation, reducing economic activity is often needed. This is a difficult process and can sometimes cause unintended short-term consequences, and risks, hence our cautious positioning. Over longer term periods we remain confident that monetary policy will balance these distortions and provide a good environment for long term returns.
And, if we’re going to achieve our long-term goals, then patience and staying the course is required.
WE REMAIN READY TO SEIZE THE OPPORTUNITY
While inflation appears to have peaked, there’s still considerable uncertainty surrounding the outcome of one of the steepest rate hiking cycles in history. As a result, we’ve diversified our Plans as much as possible, taking advantage of improved bond yields, alongside a healthy allocation to alternative assets such as infrastructure.
We’ve favoured more established share markets as a defence against riskier ones, maintaining a reserve of short-term fixed income assets (which can be used to buy shares at attractive prices).
While this may mean missing out on the odd false share rally, we firmly believe the market and global environment is one that requires caution — and we remain ready to take advantage of attractive pricing opportunities as and when they present themselves.
TOP RISKS
- Global Recession: Despite a delay, central banks’ steep interest rate hikes have heightened the risk of a greater-than-expected economic and corporate profit downturn.
Debt Crises: Geopolitics, high inflation, and errors with fiscal policy (how the government spends and taxes to influence the economy) increase the risk of credit downgrades and crises fuelled by debt sustainability concerns.
Geopolitical Crises: Ongoing crises in the Middle East and Ukraine are risks to supply chains, oil prices and, in turn, inflation.
Stagflation: A full cut-off in gas supplies to Europe would fuel an energy crisis, inflation, and a deeper recession. Rising oil prices – due to production costs by the Organization of the Petroleum Exporting Countries (OPEC) and the Middle East crisis – pose a more global threat to inflation. Higher rates would be needed to cool this at the cost of lower growth (stagflation).
China: Regulatory crackdowns and property market troubles remain an issue. Relations with the US remain an ongoing threat to the global economy.
Climate Change: Increasingly disruptive impacts on economic activity and supply chains are a threat to growth — and may drive further inflation.
INVESTMENT OUTLOOK TABLE Q1 2024
Outlook Key
| Shares | Outlook | Rationale |
|---|---|---|
| Region | Current Quarter | Why the outlook is what it is |
| United Kingdom |
Both large and small UK companies generate significant amounts of their earnings offshore (and are historically cheap). Low valuations and defensive qualities are favourable in a slowing economy.
|
|
| United States |
We’re investing in US equities as they offer access to more resilient, diversified, and defensive business models and sectors. Despite valuations still being on the high side, quality shares are attractive as negativity increases.
|
|
| Europe ex United Kingdom |
Restrictive rates and energy risks remain a threat to the region’s economic growth. We don’t think the risk of a deeper downturn are currently priced in making the region relatively unattractive.
|
|
| Japan |
Japan’s economic environment has shown signs of improvement. Easy monetary policy – which increases the supply of money usually by lowering interest rates – has also led to a strong devaluation in the yen. The possibility of a sustained recovery is decent and, with a severely devalued yen, we are mildly positive.
|
|
| Emerging Markets |
While Emerging Markets appear to be in decent shape (in terms of both pricing and underlying fundamentals), they are likely to suffer more in the event of a global recession. In addition, governance and geopolitical issues in China have increased our negative stance.
|
|
| Asia Pacific ex Japan |
China remains central to the investment case for this region, with governance, geopolitical concerns, and property market woes increasing our negativity.
|
|
| Shares Total |
|
We are continually underweighting shares because of the potential for greater-than-expected earnings disappointments due to a deteriorating economic outlook.
|
Total
We are continually underweighting shares because of the potential for greater-than-expected earnings disappointments due to a deteriorating economic outlook.
| Fixed Income | ||
|---|---|---|
| Government Bonds | Outlook | Rationale |
| Region | Current Quarter | Why the outlook is what it is |
| United Kingdom |
UK government bonds (gilts) have been through a sustained period of negative performance, as rates increased rapidly on the back of soaring inflation. With much of the rate hiking cycle behind us, gilts offer attractive growth potential and low risk.
|
|
| United States |
US government bond yields have increased dramatically over the past year. We think they offer good potential for growth and protection in the case of a recession. With much of the rate hiking cycle behind us, little risk for negative movement remains.
|
|
| Europe ex United Kingdom |
We continue to monitor the outlook for this asset class against a very uncertain geopolitical and economic backdrop, where strong European Central Bank (ECB) interest rate hikes have increased the risk of policy error. As a result, we remain neutral.
|
|
| Japan |
Japanese bonds offer little income and remain severely distorted due to the Bank of Japan’s (BoJ) “Yield Curve Control” programme. While the BoJ might alter this program, there is little expectation for significant medium-term change.
|
|
| Emerging Markets |
While Emerging Markets government bonds offer a strong yield premium compared to Developed Markets, we remain slightly negative given the potential for a global recession, which would see investors flee to the safety of developed markets such as the US.
|
|
| Corporate Credit | Outlook | Rationale |
| Region | Current Quarter | Why the outlook is what it is |
| United Kingdom |
Due to strong yields and broadly solid fundamentals within a more stabilised interest rate environment, we have a positive outlook on UK investment grade credit. The relatively uncertain interest rate environment, however, means we prefer short-dated bonds.
|
|
| United States |
Our outlook for US investment grade credit has dimmed somewhat, as valuations have realigned with long-term averages.
|
|
| Europe ex United Kingdom |
We remain slightly negative on European credit as a result of the many risks that remain, such as high inflation, weak growth, and geopolitical tensions.
|
|
| Japan |
Like Japanese government bonds, Japanese corporate bond prices are unattractive as they offer very little income.
|
|
| Fixed Income Total |
|
We are positive on bonds due to their improved prospect of returns and defensive nature in a slowing and negative economic environment.
|
Total
We are positive on bonds due to their improved prospect of returns and defensive nature in a slowing and negative economic environment.
| Alternatives | Outlook | Rationale |
|---|---|---|
| Region | Current Quarter | Why the outlook is what it is |
| Environmental |
Companies focused on reducing their environmental impact often have a competitive advantage due to greater resource efficiency, leading to lower costs. They may also experience a lower risk of loss, due to stronger corporate governance and better management teams.
|
|
| Global Real Estate |
Global real estate offers attractive value, underpinned by improved rental income streams and high interest rates. Recent troubles in the banking sector, however, mean caution is needed.
|
|
| Global Infrastructure |
The long-term outlook for Global Infrastructure remains positive, with a global need for advancement and investment. The asset class also offers exposure to stable revenue streams, making it defensive in nature.
|
|
| Alternatives Total |
|
We are positive on alternatives over the long term.
|
Total
We are positive on alternatives over the long term.
Investment Table last updated 21/02/2024
Ready to invest?
We want to help make your money work harder. It’s simple – you choose what type of investor you want to be, from cautious to adventurous, and we’ll build you an investment Plan and manage it for you.
There’s no minimum investment, and you can withdraw anytime with no penalties. We also offer ethical Plans, so you can easily invest in line with your values.
With investing, your capital is at risk. The tax treatment of your investment will depend on your individual circumstances and may change in the future.
