JP Morgan identifies top considerations for investors in 2024

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JP Morgan Private Bank has identified the top five considerations for investors as the global markets are navigating the dynamics of the new interest rate environment.

“Markets have entered an entirely new interest rate regime,” said Grace Peters, global head of Investment Strategy at JP Morgan Private Bank. “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.”

Clay Erwin, global head of Investments Sales and Trading at JP Morgan Private Bank said as the world heads into a new year, it’s time for investors to think about their investing goals and how they must adapt to – and even capitalise on – this market environment.

“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,” said Erwin.

To harness the new dynamics of a 5 per cent rate world, the private bank’s 2024 investment outlook explores five important themes.

Inflation will likely settle

To grapple with the prospect of more meaningful inflation in 2024 and beyond, investors might first look to equities. Public companies may continue to maintain both pricing power and their margins.

Moreover, while investors used bonds to help insulate portfolios from slower growth in the previous cycle, the 2024 Outlook notes that investors should consider an allocation to real assets as an inflation hedge for the cycle ahead.

The cash conundrum

Low volatility and 5 per cent yields on cash have been a magnet for JP Morgan’s clients, who are holding significantly more cash than they did two years ago, having added at least $120bn more in more in short-term money market funds and treasury bills.

This trend is global, but particularly powerful in the US where clients have over twice the allocation to short-term treasuries and money markets as their peers outside the US.

“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. But we think this is as good as it gets for cash,” said Jacob Manoukian, US head of Investment Strategy at JP Morgan Private Bank.

Bonds are competitive with stocks

While there has been a painful stretch for bondholders this year, the new rate regime represents a reset in bond market pricing, and core bonds may now be poised to deliver strong forward-looking returns.

Relative to stocks, bonds have not looked this attractive since before the global financial crisis. Despite this, the bank said four out of every five clients have not materially increased their allocation to fixed income over the last two years.

“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,” added Manoukian.

Equities on the march to new highs.

Equities offer the potential for meaningful gains in 2024. Even as economic growth slows amid higher rates, large-cap equity earnings growth should accelerate and may propel stock markets higher over the next year.

Investors do not seem to have missed the valuation opportunity. While the S&P 500 trades at an above-average valuation, there is a substantial discount to be found in US mid and small-caps as well as European and emerging market stocks.

Furthermore, the promise of artificial intelligence and the potential upside in the stocks of drug makers with a growing share of the weight loss market also provides an attractive opportunity for investors looking into next year.

Pockets of credit stress loom

JP Morgan Private Bank said next year could see stress in certain sectors of the credit complex. For example, commercial real estate loans, leveraged loans, and some areas of consumer credit – like autos and credit cards – and high-yield corporate credit could be vulnerable.

“An inescapable fact of the business cycle is that higher interest rates make credit harder to come by. We think these stresses will be manageable, and not enough to cause a recession in 2024,” added Peters.

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