Four portfolio ideas for 2024

 

Reflecting on the current economic climate and market dynamics, we've compiled four investment ideas and the ETFs you can potentially consider to help navigate the year ahead, and beyond.

For investors, the anticipated slowdown of 2023 didn’t eventuate. Inflation remained stubborn, yet equity markets boomed into 2024, and that momentum has continued through the first month of the new year.

The global economy is at an inflection point after being hit by multiple shocks over the past year. Despite predictions that equities would fall in 2023, international equities, buoyed by the boom in AI and led by the ‘magnificent seven’, finished 2023 much higher than they were at the end of 2022.

The gold price, which was predicted to fall as real rates returned to positive, ended 2023 over 14% higher.

Turning to 2024. This is a US election year and a potential election year for the UK, as one there must be held no later than 28 January 2025. Analysts are (still) predicting weaker economic growth and possibly a recession across many parts of the globe in 2024.

We recently released our quarterly ViewPoints, recapping last quarter but also highlighting what investors should look out for this coming quarter and into the rest of 2024.  

With all of this in mind, we have put together four investment ideas to consider in 2024 and the ETFs you can potentially consider to help navigate markets the year ahead, and beyond.

Idea 1: Quality international equities 

Should the global economy slow down in 2024 those companies that exhibit the ‘quality’ factor could be well placed to outperform, with smaller, quality companies potentially better placed. 

Those companies that exhibit the ‘quality factor’ have historically typically outperformed in a late-cycle environment (the period before a recession). Manufacturing activity has been contracting since the end of 2022 and over 2023, and over that time the VanEck MSCI International Quality ETF (QUAL) has outperformed the broad global equity market, as represented by the MSCI World ex Australia Index. This is not indicative of future performance.

Should the next rate movement be down, falling yields are a tailwind for quality performance as investors seek companies that have historically delivered stable earnings growth during periods of stagnant economic growth.

QUAL is an ASX traded ETF that, via a single ASX trade, provides investors with an international equity portfolio of 300 companies with fundamentals that satisfy principles of quality investing identified by investment greats Benjamin Graham and Warren Buffett, namely:

  1. High ROE;
  2. Stable year-on-year earnings growth; and
  3. Low financial leverage.

There is an Australian dollar hedged version of QUAL so you can manage your desired currency exposure. It has the ASX ticker QHAL.

As quality is a factor investors generally pay a premium for, investors wary of overpaying, or seeking more growth could consider international quality small companies. International quality small companies are currently cheap by historical standards, having been sold off before the anticipated slowdown.

In the US, historically, small companies tend to underperform during recessions and outperform in expansions but not all small companies are created equally so it pays to be prudent when investing. VanEck MSCI International Small Companies Quality ETF (QSML), and the Australian dollar hedged version QHSM,  is a way to position portfolios for a recovery and extend on the quality factor.

Idea 2: Diversified Australian equities

Despite some grim economic forecasts, the share prices of Australian banks have performed well over the past three months, CBA for example, recently hit an all-time high, trading at $118.24 per share during the last day of January. It finished the month at $118.17. This performance has been surprising, given banks typically underperform as the economy starts to slow and future rate-hike expectations fall.

Valuations have now come to the fore, Australian banks, on a global basis are the most expensive in the developed world on a 12-month forward price-to-earnings and price-to-book basis.

Should valuations move to be in line with global valuations and thus better reflect the economic outlook, it could disproportionately impact many Australian portfolios, especially those that track or are benchmarked to the S&P/ASX 200 which we have noted before is concentrated to banks which make up over 20% of the Australian benchmark index.

Such sector bias makes sense if you are bullish on the sector but given the well-noted pressures on banks remain: margins are under pressure, the economic outlook is not conducive to growth and defaults are expected to rise, we think a more balanced approach to Australian equities may be prudent into 2024.

The VanEck Australian Equal Weight ETF (MVW) is a portfolio construction solution that reduces concentration risk to banks and can be deployed to de-risk and diversify with no one security or sector dominating providing a more balanced exposure to Australia’s economy.

Idea 3: Changes in the price of gold (and gold miners)

The looming recession is a tailwind for gold as it typically fares well, delivering positive returns in five out of the last seven recessions. A recession is not a prerequisite for gold to do well however a sharp retrenchment in growth has historically been sufficient for gold to do well, particularly if inflation is also high.

Bringing inflation back down to 2% could be a long process; historically that has been the case. We believe that when these risks become more visible to markets and even more likely to generate poor outcomes for the financial system, gold is positioned to benefit.

VanEck’s Gold Bullion ETF, NUGG is Australia’s premium gold bullion ETF, physically backed by gold sourced only from Australian gold producers whose operations adhere to the LBMA Responsible Gold Guidance. In addition to trading on the ASX, NUGG investors can convert their ETF holdings into physical gold bullion.

For many investors, buying gold miners is also a way to assess the potential rise in the gold price. The advantage of holding gold miners is that their price typically rises more than the increase in gold prices, as gold miners will add their margins to gold production (and vice versa).

Last year was a noted exception. While the gold price rose over 14.5% in 2023, its miners lagged the rise of the yellow metal. The result is that gold miners are currently undervalued relative to the price of gold bullion. VanEck’s Gold Miners ETF, GDX gives investors instant access to 51 of the largest and most liquid global gold mining companies. GDX is the most cost-effective gold miners ETF on ASX.

Idea 4: The direction of rates and Australian fixed income

The market consensus is that the RBA cash rate has peaked. Should inflation continue to fall, it is likely that the long end of the curve will fall, benefiting longer-term bonds.

The VanEck 10+ Year Australian Government Bond ETF (XGOV) is a portfolio of Australian government bonds that have maturity dates between 10 and 20 years, so could potentially benefit from a fall in rates.

Should inflation return, however, VanEck also has a range of shorter-duration fixed-income funds, like 1GOV, which is a portfolio of Australian government bonds which have maturity dates between 1 and 5 years and FLOT which invests in a diversified portfolio of floating rate notes which represent the Bloomberg AusBond Credit FRN 0+ Yr Index.

We wish we had a crystal ball, but the only thing investors can rely on is uncertainty and we think 2024 will be no different.

As always, we recommend you speak to a financial adviser or stock broker about any of the strategies mentioned above.

Published: 02 February 2024

Key Risks: An investment in any of the Funds carries risks. These risks vary and are generally more pronounced in equities funds when compared to fixed income funds. It is important that you read the relevant PDS for details about the risks associated with each of the Funds.

Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.

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