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  1. Wealth
December 6, 2023

Higher-rates will give investors ‘more choices’ as bonds become competitive with stocks in 2024 

UHNW investors can take advantage of a 'once in a generation entry point' for bonds, while equities can provide a hedge against inflation, according to a new investment outlook from J.P. Morgan Private Bank

By Rory Sachs

2024 is shaping up to be a bumper year for investors, with inflation moving back from highs not seen in decades and bond yields becoming more attractive as part of multi-asset portfolios.

That’s the optimistic message of Kristin Lemkau, CEO of J.P. Morgan Wealth Management, in the financial institution’s newly released investment outlook for next year, which predicts that while inflation will further settle, investors should still look to hedge against it, perhaps through investments in equities or real assets.

‘Global multi-asset portfolios have regained more than half of the ground that was lost from the market peak in late 2021 to the trough in October 2022,’ Lemkau wrote in the Outlook 2024: Investing Reconfigured report. 

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[See also: J.P. Morgan Private Bank wins big at The Spear’s Awards 2023 – see all of the winners here]

‘At the same time, a historic rise in global bond yields has reconfigured the investing landscape. Higher rates give investors more choices in crafting their financial plans than at any time since the global financial crisis.’ 

The report stated that investors are ‘starting to believe’ inflation would stay at higher levels than those seen at the end of the 2010s — with higher interest rates needed ‘to help keep it in check’. ‘We agree with that assessment,’ the report read, before pointing to some other signs showing that ‘shelter inflation’ (including home prices and rents) ‘will continue to cool to a manageable level’ in the US.

Inflation set to fall as investors urged to hedge against a ‘higher inflation world’

But there are some ‘countervailing forces’ which may keep inflation rates higher for longer. For one thing, an the energy transition may lead to higher commodity prices, while ‘consumer and investor inflation expectations could also nudge inflation higher—becoming in effect a self-fulfilling prophecy,’ the report noted.

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Summing up the assessment around inflation, Clay Erwin, J.P. Morgan Private Bank’s global head of investment sales and trading, said: ‘Compared to this time last year, the inflationary outlook is far less bleak. However, we think that 2 per cent mandate will become the inflation floor, not the ceiling…Investors still need to prepare for a higher inflation world, just not as high as we’ve experienced recently.’ 

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‘Once in a generation entry point’ for prospective bond buyers

Aside from inflation, the more favourable outlook around rates means it is time for investors to ‘adapt to — and even capitalise on’ the rise in bond yields. 

‘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,’ Erwin added. 

While bond holders had endured a painful period earlier this year, core bonds now offer the prospect of delivering stronger forward-looking returns.

‘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,’ said Jacob Manoukian, US head of investment strategy at J.P. Morgan Private Bank.

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‘Markets have entered an entirely new interest rate regime,’ added Grace Peters, J.P. Morgan Private Bank’s global head of investment strategy. ‘Three years ago, nearly 30 per cent 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.’

Hedging against inflation with equity investments 

In addition to the new opportunities for investors provided by higher bond yields, investors could look to equities as a performance driver in a new environment of higher-than-2 per cent inflation. 

One of the main ways to provide ‘long-term capital appreciation in portfolios,’ equities are expected to continue to ‘outperform’ bonds over the long term. 

Next year, gains could come from large-cap stocks, where growth is expected to accelerate. Meanwhile, with nine of out 11 major sectors in the S&P 500 already reporting negative earnings in three consecutive quarters between 2022 and 2023, companies had become more resilient, with leaner cost structures. 

‘We believe the US large-cap corporate sector has gone through an earnings recession already,’ noted Christopher Baggini, the bank’s global head of equity strategy.

[See also: ‘Disruptive’ tech, US equities and Asian markets provide opportunities for UHNWs in 2024, according to HSBC Global Private Banking]

While higher rates can make some investors ‘sceptical’ of valuations, ‘we think they appear reasonable in the United States and inexpensive elsewhere,’ the report read. ‘The S&P 500 trades at above-average valuations on a price-to-earnings basis, while US mid-cap and small-cap stocks (and European, emerging market and Chinese stocks) all trade at a substantial discount.’

The report also picked up on trends in both public markets and private equity which could ‘generate long-term outperformance’, including growth around AI and new weight-loss drugs. ‘From an investor’s perspective, we see potential upside in the stocks of drug makers with a growing share of the weight-loss market,’ it read.

Investors are facing a ‘cash conundrum’ 

J.P. Morgan Private Bank’s investment outlook also noted that investors are facing a ‘cash conundrum’ — and must weigh up the benefits and risks of holding too much cash. ‘Yields are tempting. But we think this is as good as it gets,’ the report cautioned. 

Although the report acknowledged it ‘had paid to stay in cash’ over the past two years, amid high market volatility and high rates, it was time to consider ‘cash as you do any other asset’, by ‘asking how it fits into your goal-aligned wealth plan.’

While cash ‘works best’ in periods where interest rates are rising steeply, it ends up being a less good investment in a period of falling rates. 

[See also: Next-gen billionaires are breaking away from their family businesses as they inherit wealth]

‘From a planning perspective, holding more cash today than you did in 2021 or 2017 is probably fine. Cash yields after inflation are at some of their highest levels of the last 20 years. But holding relatively more cash probably isn’t the best use of your overall portfolio,’ the J.P. Morgan Private Bank report said.

‘Allocating assets outside of cash reduces the amount of capital that is required today to fund a goal with a high degree of confidence. It could also allow your wealth to fund more goals than you could with an all-cash approach.’ .

The need to reconsider the role of cash in a portfolio may be particularly important for US-based investors. There, ‘clients have over twice the allocation to short-term Treasuries and money markets as their international peers,’ the report noted. 

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