There is no doubt about 2023’s big investment winner, as US mega-cap technology stocks did it again.
The Magnificent Seven (Apple, Microsoft, Google-owner Alphabet, Amazon, Nvidia, Facebook-owner Meta and Tesla) now make up 28 per cent of the S&P 500 index, the heaviest concentration in 50 years.
Can they do it yet again in 2024? Possibly not. Analysts warn they now look expensive and urge caution.
Anyone looking to invest, say, $10,000 (Dh36,725) over the first quarter of 2024 might consider the following three options instead.
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The first will generate both income and capital growth, assuming inflation and interest rates fall in 2024 as expected.
The next two are a bit riskier. They involve investing in two of 2023’s biggest underperformers, in the hope they come good in 2024.
As with any investment, you must consider both the risks and rewards and aim to hold for a few years, not just three months.
Bonds
Government and corporate bonds are meant to be boring. That’s not the case today. They crashed in 2022, were volatile for most of 2023, and analysts reckon they offer one of the most exciting opportunities of 2024.
Bonds pay a fixed rate of interest. Nobody wanted that when inflation took off and central banks hiked rates month after month. Hence the price crash.
Interest rates appear to have peaked and should fall next year, with the US Federal Reserve suggesting it may cut rates at least three times during 2024 (markets are betting on up to six cuts).
Suddenly, locking into a fixed rate of interest is attractive and Clay Erwin, global head of investments sales and trading at JP Morgan Private Bank, says investors should capitalise on the shift.
“It may mark a once-in-a-generation entry point for investors that might not be available a year from now,” says Mr Erwin.
With the global economy expected to slow, fixed income is now one of the best-positioned asset classes, says Matt Nest, global head of active fixed income at State Street Global Advisors.
“We believe an overweight duration position in sovereign debt, namely US Treasuries, will enable investors to price in lower rates,” says Mr Nest.
Michael Strobaek, chief investment officer at Lombard Odier, is also backing US government bonds.
“Peaking interest rates and a slowing economy should favour high-quality fixed income, which should also offer some diversification benefits, particularly in a downturn. We like longer-dated government bonds and prefer US Treasuries,” he says.
Most private investors will prefer a spread of bonds through a low-cost exchange-traded fund (ETF).
The iShares Core US Aggregate Bond UCITS ETF has a yield to maturity of 4.78 per cent and charges 0.25 per cent a year.
Vanguard USD Treasury Bond UCITS ETF has a 4.6 per cent yield to maturity and 0.07 per cent charge.
Bond prices rise when yields fall, so investors may get capital growth, too. There are hundreds more bond ETFs, so research is required.
UK dividend stocks
Jason Hollands, managing director of Evelyn Partners, suggests shunning US tech stocks amid “ballooning valuations” and embracing “unloved UK shares instead”.
“The UK has faced severe headwinds from inflation, rising borrowing costs and higher taxes, but doom and gloom predictions by the Bank of England and a slew of international organisations have proved overly excessive,” says Mr Hollands.
UK equities now trade at 10.2 times their forecast earnings, he notes.
“That’s a massive discount to global equities, which are at 16.9 times earnings,” he points out.
Simon Gergel, manager of investment fund The Merchants Trust, says UK shares are trading near 20-year lows, giving investors “fantastic opportunities to buy strong, globally exposed businesses that are well-financed on very modest valuations”.
“Historically, this has been a good time to invest as investment returns are often linked to the price you pay for the assets. Currently, these prices are very low,” he says.
The UK has one more attraction. FTSE 100 stocks pay some of the most attractive dividends in the world, with a dozen stocks yielding 6 per cent or more.
Insurer Phoenix Group Holdings yields 9.72 per cent, asset manager Legal & General Group yields 7.74 per cent and housebuilder Taylor Wimpey yields 6.47 per cent.
With savings rates and bond yields set to fall in 2024, dividend income could look even more attractive, luring investors back to the UK.
Mr Hollands warns the UK isn't out of the woods yet, as borrowing costs remain high, hitting businesses and consumers, plus there is an election coming up.
The SPDR S&P UK Dividend Aristocrats UCITS ETF currently yields 4.26 per cent and charges 0.3 per cent.
For higher income, the iShares UK Dividend UCITS ETF yields 5.36 per cent with a 0.4 per cent annual charge.
Buying UK shares means swimming against the tide. Talking of which …
China
One year ago, analysts were hailing an expected China resurgence as strict Covid lockdowns ended. It never arrived.
Chinese consumers were cautious and the government resisted further stimulus, despite contagion fears after property giant Evergrande Group filed for bankruptcy with $300 billion of liabilities.
Investors are now much more cautious about the next 12 months, but Dale Nicholls, portfolio manager of Fidelity China Special Situations, reckons this might be an opportunity.
“Investor sentiment towards China has been weak, so a positive turn here could be a big surprise in 2024,” he says.
Yet, it could happen.
“A key area to watch will be the pace of the consumption recovery. Chinese citizens are sitting on record amounts of savings, but consumer confidence and household consumption remain muted,” Mr Nicholls adds.
Business confidence is low, tech companies have been cutting jobs and youth unemployment is high, but he reckons the worst may now be over as the unemployment rate starts to decline.
With Chinese stock valuations trading at 20-year lows, now could be a good time to get in early, says Joseph Hill, senior investment analyst at Hargreaves Lansdown.
“There could be opportunities for investors willing to look through the gloom to the long term,” says Mr Hill.
It’s a risky bet, though, and most don’t want to know. Investment platform Interactive Investor says just 3 per cent of its clients plan to invest in China this year.
Yves Bonzon, group chief investment officer at Julius Baer, is also wary.
“China is in a balance sheet recession and is facing further structural headwinds due to very adverse demographic and economic developments,” says Mr Bonzon.
It’s a contrarian play, but analysts were too bullish a year ago and may be too bearish today.
Investors could place a long-term bet on a Chinese recovery by investing in an ETF such as Invesco Golden Dragon China ETF, SPDR S&P China ETF or iShares MSCI China, or a broader emerging markets ETF.
As always, only invest as part of a balanced portfolio with a minimum term of five years, and ideally decades.
Disclaimer: The writer holds shares in Legal & General Group and Taylor Wimpey
