With inflationary fears beginning to ease, threats and opportunities abound in markets, but investors face considerable risk and volatility. Against this backdrop, we believe it is important to ignore wider market distractions and remain focused on investing in the right asset classes and at the right time.

UK inflation: is it under control?

After months of interest-rate rises and concerted efforts by central banks to ease inflationary fears, monetary-policy measures appear to be working. November 2023 saw US inflation levels cool to 3.2% from a high of 9.1% in June, with the UK market also showing promising decreases.

But while the UK has seen the biggest drop in inflation figures since the early 1990s, the economic outlook remains uncertain. A recession is now confirmed, though how long it will last is another question.

In any case, we are not out of the woods just yet; inflation is still quite high, and energy prices are a significant factor to consider. As we navigate 2024, we may find the US economy remains resilient.

Multi-asset investors need to keep a tight focus on the assets most likely to generate strong returns. That means avoiding short-term noise and focusing on the bigger picture.

Why multi-asset?

From an asset standpoint, the key question is: which way should investors turn next?

While 2023 was a less-than-stellar year for alternative investments such as renewable energy, we believe they remain broadly attractive. Revenues of many of the underlying companies in the alternative investment sector are index-linked so can offer some protection against inflation.

Across more mainstream asset classes, bond markets are also showing signs of real recovery following a challenging 2022. We think bond yields are looking increasingly attractive, both in the UK and in the US, in the longer-dated part of the universe. After over a decade of negative real yields, investors can now achieve true inflation protection from fixed income.

In equity markets, there remain strong pockets of opportunity. However, it could be argued that much of the success of stock-market indices in 2023 was driven by large US technology companies, in particular the ‘magnificent seven’, with more mixed performance elsewhere.

In our view, the success of these top companies has tended to overshadow weakness among other companies and sectors. It has actually been quite a challenging 12 months for equity investors, although price/earnings ratios do look to be improving and the equity-market picture remains balanced, as fiscal spending has remained supportive.

Key elections await

From a thematic standpoint, we see key potential drivers of change and opportunity for committed equity investors. They include the energy transition, technological shifts, the rise of state intervention and ageing populations. But there is also real reason for caution. Geopolitical factors could still spook investors and spark renewed market volatility.

The coming year will see general elections across several major economies – including the US – and uncertainty about their outcomes could heighten investor nervousness.

While this may weigh on investor sentiment, it might pay not to focus too much on headlines. We will hear a lot of noise, but it is important to stay focused in order to pinpoint businesses that can continue to generate strong cash flows and investor returns.

A version of this article first appeared on Morningstar.co.uk

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Bhavin Shah

Bhavin Shah

Portfolio manager, Mixed Assets Investment team


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