The value of investments can fall as well as rise and losses may be made. This is not a buy, sell or hold recommendation for any particular security. Welcome to 91's 2024 investment views. In this series of conversations, our investment professionals and portfolio managers will explore their views for the year ahead and assess the outlook for their asset classes and regions.
I'm Ellie Captain and I'm a portfolio specialist in the multi asset team and today I'm joined by John Snopford who's going to be giving his outlook for 2024 for multi asset income. So John, 2022 was an extraordinary year with both bonds and equities falling. How is 2023 shaping up by comparison? It's been another, 2023 has been another tricky year so far.
We've seen some big shifts I think in consensus thinking both in terms of growth going from expecting a recession to now thinking about rates being higher for longer. And as a result, we've seen some fairly dramatic turns in markets. So traditionally, defensive fixed income has once again had a tough time, but also equities have shown fairly mixed performance. So there's been a narrow AI theme that's driven large cap US equities, but a lot of other equity markets are flat to down on the year.
In terms of rates that you've just mentioned, the higher for longer rates outlook has brought cash back into the mix. Looking forward into 2024, is cash a good option for investors? Cash is potentially part of an investor's solution. Our concern would be that cash comes with a number of risks, the most obvious being reinvestment risk.
So the rates that you can get today, you may not get in the future. And typically when cash rates go up, after a while they come down again. Secondly, you give up opportunity, essentially. So you have opportunity risk or opportunity loss.
Cash rates moving typically move asset prices, and that creates interesting future return opportunities, which you'll miss if you're just sitting in cash. And then also, I think you can think about perhaps taking a bit more risk than you might otherwise have done in recent years, because cash provides a bit of a cushion. If you're earning a decent yield on cash, you can actually then think about taking a little bit more risk elsewhere. What will high rates mean for more asset investors in 2024?
High rates typically move asset prices and, obviously, push average yields up across markets. And for income investors, that creates lots of opportunity. It also has macroeconomic consequences. So the big challenge is, have rates gone up enough?
Are they going to start to squeeze economies and lead to recession? So typically, monetary policy is a really blunt tool. The Fed and other central banks are trying to fine-tune the economy with a hammer, and that usually causes accidents. So the implications are both opportunity and risk, I think.
When we look at fixed income, the performance of bonds in both 2022 and 2023 so far has called into question the defensive qualities of fixed income holdings. As such, how should investors be thinking about managing downside risks? I think investors need to rethink fixed income. So a lot of investors have grown up with two protracted trends.
One was a bull market since the 1980s, which flattered the returns that you can get from fixed income in normal circumstances. And then for the last 20 years, bonds have exhibited a negative correlation with equity markets, and that has meant they've had useful diversification properties. Neither of those will necessarily hold true in the future. And so we think investors need to be a bit more thoughtful about how they build their portfolios.
Potentially different parts of fixed income will be useful at different times. But then, as we've seen in recent years, bits may need to be avoided for periods of times as well. But also, we would suggest investors cast the net wider. They look for fixed income-like assets elsewhere in the asset class spectrum.
So for example, equities that pay reliable dividends could be an alternative, for example, to inflation link bonds. Something that we've seen come to the fore is geopolitical tensions. So if we see an escalation in those, how should that impact the outlook for investors? So typically, geopolitics are a driver of risk.
They create noise. They don't generally change fundamentals, but they can cause asset markets and asset prices to move around. So portfolios need to be able to cope with risk. Sometimes they can change the fundamentals.
So understanding their importance, their relevance is also part of the equation, I think. But generally, you need to focus on what's going on economies underneath. Looking then out into 2024, where exactly are you seeing risk and opportunities across the spectrum of income-generating assets? Well, it's clearly an uncertain world.
And it has been for some time. And some of the factors we've talked about adding to that. So we tend to think about the world in terms of scenarios. So rather than saying one thing is going to happen and hope it does, we actually try and build portfolios to the robust to different outcomes.
Our central case is more pessimistic than the consensus. The consensus is looking for some variant of a soft landing globally with well-behaved inflation and, ultimately, peaking interest rates. That just looks a little bit too neat to us. We think the consequence of very rapid, very large rate increases is probably ultimately going to be a recession.
In that kind of scenario, you want to own interest rate-sensitive assets, particularly in areas where interest rates are likely to be peaking and potentially can come down a long way. So there are a variety of countries across the developing world and across the emerging world, where they're beginning to see that feel the pain of higher rates. And you can see the scope for them to decline significantly, and bonds in those markets in particular will do well. We also think there are opportunities in individual equities where they can also benefit from lower rates, and they also have strong underlying cash flows supporting their dividends.
We do, though, need to cover the possibility that the world turns out to be more in line with the consensus, or maybe even more extreme. So if the consensus is right, risk assets, growth assets generally probably do okay. In those circumstances, things like options or call options on equities potentially provide you cover if equity markets continue to run, and we think they're fairly cheap at the moment. But the flip side is if things are too strong and central banks have to raise rates more aggressively, it's probably going to be tin-helmet time.
It's going to be more a function of reducing risk and protecting capital than looking to make too much money, although we think there will always be opportunities to add value and make returns. Great. Thank you very much, John. This podcast is a marketing communication and is provided for general information only, and assumes a certain level of knowledge of financial markets.
It is not an invitation to make an investment and should not be construed as advice. The views of this podcast are those of contributors at the time of publication and do not necessarily reflect those of 91. In South Africa, 91 is an authorized financial services provider.