The global markets have entered an entirely new interest rate regime in 2024, and investors are learning to adapt to make the best of it, according to JP Morgan.
Three years ago, nearly 30% of all global government debt traded with a negative yield. At the time, it seemed the era of super-low interest rates might never end. Nevertheless, it did. Now, investors are thinking about their investing goals and how they must adapt to–and capitalise on – the new market environment.
In an interview with Finance Middle East, Steven Rees, Managing Director and Global Investments Specialist at JPMorgan Private Bank, discusses the key investment considerations he advises clients to keep in mind going into 2024.
Hedge against credit and inflation
Compared to this time last year, the inflationary outlook is” far less bleak”, according to Rees. The annual inflation rate for the United States was 3.1% for the 12 months ending January 2024, compared to the previous rate of 3.4%, but still above the US Federal Reserve target of 2%. Globally, headline inflation is expected to fall from 6.8% to 5.8% in 2024 and reach 4.4% in 2025.
JP Morgan believes that the 2% mandate will “become the inflation floor, not the ceiling”. As a result, investors are advised to prepare for a higher inflation landscape, although not as high as what the world has experienced recently.
When it comes to the credit complex, Rees also predicted that 2024 could see stress in certain areas, such as commercial real estate loans, leveraged loans, and some aspects of consumer credit – like autos and credit cards – and high-yield corporate credit could be vulnerable.
“We think these stresses will be manageable, and not enough to cause a recession in 2024,” Rees added.
Cash, bonds or stocks?
As inflation continued to rise in previous years, investors have increasingly been holding to cash, motivated by low volatility and 5% yields on cash. JPMorgan Private Bank’s clients “are holding significantly more cash than they did two years ago”, Rees said, stressing that these investors have added at least $120 billion more in short-term money market funds and treasury bills during this time.
“Cash works best relative to stocks and bonds in periods when interest rates are rising quickly, and investors question the durability of corporate earnings growth,” Rees explained. “But we think this is as good as it gets for cash.”
However, the market is changing. Interest rate cuts are on the horizon and inflation is set to fall in the coming months. JPMorgan expects a “reset” in bond market pricing that would lead these investments to deliver strong forward-looking results in the months to come, despite the painful stretch bondholders suffered over the past year.
For investors looking at bonds to provide stability and income, Rees said that both are now well-positioned to deliver on these two fronts.
“Relative to stocks, bonds haven’t looked this attractive since before the global financial crisis”
Steven Rees
AI and equities
The promise of artificial intelligence (AI) is hardly a secret. Nonetheless, JPMorgan believes the latest technological advances could have profound implications for corporate productivity and profitability.
“AI has already seemingly started a new technology research and development cycle,” Rees observed.
He is not wrong. The latest research and development (R&D) budgets for the top five tech companies alone have eclipsed $200 billion per year and are rapidly approaching the US government’s R&D spending of around $250 billion. As a result, AI stocks have also become an attractive opportunity for investors looking into next year.
“Equities offer the potential for meaningful gains in 2024,” Rees said. “We believe the US large-cap corporate sector has gone through an earnings recession already, with eight of the eleven major sectors in the S&P 500 having reported negative earnings growth for two or more consecutive quarters over the last two years. These companies have emerged leaner and resilient to potential challenges that 2024 could present.”
Investing with impact
Increasing global temperatures have highlighted the urgent need to address climate change. With extreme weather events becoming more frequent, the consequences of climate change are undeniably impacting our world–and investors are taking note.
“It is clear that we need new and innovative solutions to help companies and countries move towards less carbon-intensive ways of doing business,” Rees said. “Across sectors and geographies, scientific breakthroughs and technological innovation are responding to this demand, presenting an opportunity for investors to participate in this ‘clean revolution’.
“There are a variety of ways to gain exposure to these trends. But investors need to act fast.”
In the last five years, the number of public market funds investing in climate has accelerated from fewer than 200 to about 1,400. This includes both climate transition funds as well as clean energy funds. Moreover, in the past 18 months alone, assets have grown 30%, fuelled by investor interest in Europe, China and the US.
Private equity investments in climate-oriented sectors have also seen remarkable growth. The global volume of climate-oriented equity transactions is estimated to have surged by 2.5 times, rising from approximately $75 billion in 2019 to $196 billion in 2022, particularly in areas like power, transportation, hydrogen and carbon management.
The market is changing, as it always does. Nonetheless, in this new environment, bonds, tech stocks and green funds might just hold the key to success.
