7 Minutes on Markets - Q1 2024 Market Update

Elliot McNamara: Hello and welcome to another edition of 7 Minutes on Markets. My name is Elliot and today I'm joined by Ben, our Head of Equity Strategy.

Ben Kumar: Hello!

Elliot: And Ahmer, Head of Fixed Income Strategy.

Ahmer Tirmizi: Hi there.

Elliot: So today we're gonna run through a little bit of 2023, what happened, how it affected the markets - if we can in just seven minutes. Ben, if you got something to start with?

Ben: Of course. So 2023 was a... I mean, it was a year that quite literally dumbfounded expectations, by which I mean at the start of 2023, everyone was nervous about a recession. You know, most investment banks in the US and the UK, in Europe were forecasting a US recession or, at the very least, almost no growth in the United States. Even the Federal Reserve, who sets interest rate policy for the United States, were suggesting there was going to be almost no growth in the economy. Cut 12 months later and the US is going to have grown about 2.5%, not a million miles off its long-term average. So the fact that everyone was very, very nervous going into the year and then nothing bad materialized meant there was a situation where quite a lot of investors ended up positioned incorrectly positioned for doom and gloom when actually things turned out alright.

Elliot: Right, so with this in mind, how do we… what's our outlook for 2024? I mean, what do you think we can kind of learn from 2023 and I'm reflection apply to our investments in 24?

Ahmer: I think the main thing that we can learn is that it's very difficult to know what will happen. But let's think about some of the things that we can, though. Number one is interest rates are high. They’re as high as they’ve been for a very long time. I mean we also kind of know that inflation is due to fall a little bit further. Now, where is exactly going to land it's difficult to say, but from a high starting point it's more likely to fall than it is to rise.
What’s more difficult to know is what's going to happen to economic growth. The central banks have aggressively increased those interest rates in order to slow down growth. But where exactly and how exactly the economy or lands as it were, is more difficult to say. And finally, the most difficult question on top of that is, what exactly is that going to mean for markets? And as Ben said, it's very easy to overlay your views on what's going to happen to markets with the views that you think that are going to happen in the economy, but it's a lot more difficult to actually predict.

Elliot: OK, so it sounds like more uncertainty, more complications… with this in mind, what is it that 7IM are doing to kind of weather the storms of 2024?

Ben: Yeah, so there has not been, in my history of investing, in Ahmer’s history of investing, in the history of investing, an easy year ever. There's always uncertainty. The thing to do, though, and Ahmer mentioned it, is not to get sucked in to making one big prediction and then hanging your long-term portfolio around that. If you position for a recession and one doesn't appear, you end up missing out on returns. Or if you're overly optimistic and then a recession comes, you know you lose, you lose quite a lot of your games. So the thing we're doing is what we always do: looking to prepare portfolios for most eventualities. And I think there's probably a couple of exact positions Ahmer can talk about.

Ahmer: So if you're looking to prepare portfolios for 2024, for a world in which you're uncertain of what's going to happen, we'll start with what you do know, and what we do know for a fact is that interest rates are at a multi-decade high right now. So why not lock in those yields? If you look at global government bonds across the world, those… the rates that they're offering right now are attractive enough that, if the world's… whatever in the world does take place, you're going to get paid a rate over and above inflation. But if you're worried about a particularly uncertain economic outcome, if the central banks, if the hikes that the central banks have been conducting over the last couple of years, does generate an economic recession, what you do want to look for asset classes that can do well in the market stress, and that's where foreign currency is key. Holding asset classes that are not sterling, essentially in a market stress situation, are exactly the right… exactly the reason why multi-asset portfolios are key to own in those situations. And we tend, we actually have an exposure over and above that to the yen, but really just generally speaking the FX foreign currencies that are a good position to hold. And finally, even in a world in which you don't believe that there's going to be a recession, companies like healthcare, healthcare companies or in the healthcare sector, tend to also do pretty well, either because they've got strong, stable earnings, which in an economic downturn can often weather market storms, but also, actually, they tend to grow at around the same rate as the market anyway. So even in upturns, they also can do pretty well.

Elliot: So it seems like there's still some opportunities out there, despite some pretty gloomy outlooks. Guys, thank you very much for joining me today. This has been 7 Minutes on Markets. See you next time.