Corporate bonds, liquid assets key to investment wins in 2024: Standard Chartered

The expected US recession next year will significantly impact how bonds perform.

Investing your wealth in 2024 will be a tightrope of looking out for macro headwinds amidst slower economic growth and sliding inflation, whilst taking advantage of the strong equity and bond markets early in the year, Standard Chartered’s Wealth Management chief investment office (CIO) said in its latest outlook report.

The US and other major economies are likely to witness sharply slower growth and sliding inflation in 2024, SC’s CIO noted in its report “Outlook 2024: Sailing with the Wind.” 

On the other hand, equity and bond markets are expected to start 2024 positively, supported by hopes of a soft landing and central bank policy shifting towards supporting growth.

“We expect the global disinflationary trend to extend into 2024, lifting real incomes. The boost to consumption fuelled by excess savings built during the pandemic is also lasting longer, and there are signs of a recovery in the global inventory cycle,” SC’s CIO said in its report.

Given this, there is an increased chance of a soft-landing in the US, at least in the first half of 2024. However, there remains an “elevated risk” of a US recession next year amidst tight policy. 

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Look into high quality bonds
Steve Brice, global chief investment officer, said that investors should consider their investment objectives, time horizon and ability to weather drawdowns in their portfolio. 

“The key to successful investing discipline: don’t be a forced seller, whether it be due to emotional or financial needs, and avoid excessive, permanent losses,” Brice said.

High quality corporate bonds also stand out, given that they are moderately valued. This meant that they are not excessively priced for a soft-landing and have diversification qualities that lag only the most conservative safe-haven assets, the office noted.

The Japanese yen also looks interesting, according to Brice. “It is now at the cheapest it has been in years and a Fed policy easing cycle would potentially set the currency up for significant gains,” the report added.

Diversifying portfolios
The office also offered advice on how investors can better diversify their investments in 2024, noting liquid alternatives and cash as standouts.

“Liquid alternatives and cash significantly reduce portfolio volatility with only a moderate sacrifice in returns, compared with US government bonds. Gold also performs well by lowering portfolio volatility without impacting returns,” the report stated.

But even cash and gold are still vulnerable, and may have reduced effectiveness, in the event of the US sinking into a more severe-than-expected recession, the office said.

SC’s CIO noted two key risk scenarios confronting investors in 2024. In the first scenario, the last mile of global disinflation proves difficult, and the stock-bond correlation remains positive. This will hurt the diversification benefits of bonds. 

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The second risk scenario, meanwhile, is if the US descends into a more severe-than-expected recession. If it happens, liquid alternatives and gold will not be as effective in this scenario. Bonds, however, would, may once again return to favor, the report said.

“We have already mentioned that government bonds are poised to return to their role as diversifiers as inflation subsides, but a recession would likely accelerate this process,
with central banks cutting policy rates in response to slowing growth. High quality corporate bonds also stand out,” SC’s CIO said.

SC WM CIO’s investment strategy
SC’s Wealth Management CIO also outlined how it plans to allocate assets in 2024.

For Foundation allocations, SC CIO believes that the highest convictions are in high quality developed market government bonds, particularly those with longer maturities; global equities heading into early 2024, led by the US and Japan; and global equities and global bonds, which SC believes are likely to deliver cash-beating performance.  

Meanwhile, the CIO’s Opportunistic allocations said that it will take advantage of stock and sector dispersion to capture short term opportunities, with a view to buy communication services, technology and healthcare equity sectors in the US; buy consumer discretionary, communication services and technology sectors in China; and play the USD range.