Blog post by Empower Wealth

Wash, Rinse, Repeat: VanEck’s 2024 Q1 Summary

Please Note: This report was created and provided by VanEck.

2023 was a year of multiplicity. We’ve seemingly experienced central banks swinging, depending on your interpretation, back and forth between tightening to loosening all year. The peaks and depths of the US 10-year government bond yields swung between 5.02% (October 2023 high) and 3.25% (April 2023 low) to be above 3.93% at the time of writing. These are big swings in a short time.

We’ve also experienced AI booms, geopolitical ructions and the continued reversal of globalisation. There has been a shift in the new world order. No longer can the West rely on China to be a part of supply chains. China is grappling with its own, different problem.

Looking ahead, it’s potentially bumpier than the year past.

2024 is a US election year. Add in a potential UK general election, which must be held no later than 28 January 2025, and the unknowns into 2024 become greater.

For investors, rates and inflation will remain where they generally belong, front and centre. The magnitude and speed of policy rate rises in 2022 and 2023, unprecedented for many as few participants experienced the 1970s stagflation era, seem to have tamed, but not yet eradicated, inflation.

A feature of the late 70s/early 80s was the return of inflation and central bankers will be wary not to make past mistakes again. The next interest rate moves will be carefully considered. So far, the data supports the notion that we have hit peak rates this cycle, at least equity markets seem to speculate this is so.

November and December saw a ‘risk on’ rally.

The S&P 500 had one of its top 20 best monthly performances in its entire history in November, up over 9% in local currency. This dominated the quarter. Australian small caps and Australian equities were among the best-performing asset classes for the quarter. As has been gold, buoyed by US dollar weakness. Global and US equities were boosted by IT, while in Australia bond proxies such as real estate and healthcare have led the charge on the back of falling Australian 10-year yields.

With markets seemingly embracing rate cuts next year we would caution that a pivot isn’t always a good thing for risk assets. A pivot is in response to an economic slowdown. If the slowdown is in response to a recession, risk assets do not have a strong history of pricing a recession. Except for the two 1970s bear markets, recession-driven bear markets rarely start more than 6 months before the recession starts. A soft landing, however, could still materialise. Data will be key.

So how do investors approach 2024?

The investment playbook is to approach risk assets selectively. A good start is to focus on leverage i.e. balance sheets and cash flow. We could see the US dollar come off further and gold continue to shine. Navigating equities smarter through factor strategies such as ‘quality’ and ‘low-size’ becomes more meaningful. Asset allocation comes back to the fore, particularly after the brutal bond sell-off of 2022/2023. A new wave of opportunities will present themselves and smart money anticipates this.

During the past quarter, the investment industry lost one of its doyens when Charlie Munger passed away, aged 99. Among his many lessons, he did say, “It takes character to sit with all that cash and to do nothing. I didn’t get to where I am by going after mediocre opportunities.”