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Outlook 2024 – Investing Reconfigured

Over the past few years, interest rates have risen dramatically across the globe. Negative yielding debt, which comprised nearly 30% of developed market government debt just three years ago, has all but disappeared. Rates have reset to levels not seen since before the global financial crisis, with U.S. Treasury yields across the curve now ranging from around 4.5% to 5.5%.

This significant rise in rates has reconfigured the investing landscape, providing investors with more attractive options to consider in building their portfolios than in over a decade. However, with this newfound flexibility also comes challenges in determining the best strategic asset allocations. To help navigate the current environment, the report identifies five important considerations for investors.

Inflation will likely settle, but investors should still hedge against it

While inflation surged to multi-decade highs in 2021 and 2022, it has since retreated substantially. In the U.S., inflation has fallen from over 9% to under 3.5% currently. Factors like cooling services inflation, an improving labor market balance, and moderating wage growth point to continued declines. However, inflation is expected to settle at a higher 2-2.5% level compared to the 2010s, requiring ongoing inflation hedges.

Equities can provide inflation protection given their ability to pass through higher prices. Real assets like real estate and infrastructure also tend to inflation-proof portfolios through lease escalations and replacement cost appreciation of existing structures.

Cash yields are attractive but risks remain from holding too much

Cash has been a magnet for investors seeking yield and stability in recent volatile markets. However, holding excess cash long-term reduces strategic flexibility and commitment to higher-returning assets. While reasonable in the near-term, cash works less well when rates fall and earnings growth improves. The report expects such a backdrop in 2024.

Bonds are now more competitive with stocks due to higher yields

The rate reset has increased bond yields substantially across sectors. With yields near historically high levels, bonds can potentially deliver strong forward-looking returns while providing portfolio stability. The report projects 5%+ annual returns for core bonds over the next 10-15 years based on this reset. Higher yields also reduce downside risks, making bonds more compelling relative to equities.

Equities still offer upside from trends like artificial intelligence

While valuations are above average in the U.S., other markets appear inexpensive and offer potential upside if earnings exceed low expectations. Sectors exposed to productivity gains from artificial intelligence adoption are a particular focus. The report also points to opportunities in weight loss drug makers, infrastructure spenders, and selective consumer staples.

Credit stresses will be limited despite vulnerabilities

Higher rates pressure credit availability, with commercial real estate, leveraged loans, and parts of consumer debt showing early cracks. However, balance sheet strength in corporate credit and housing should contain broader stresses. The report sees opportunities in relative value credit strategies, private credit, and commercial real estate dislocations.

In conclusion, the new interest rate environment presents a once-in-a-generation opportunity for investors to optimize their portfolios. By understanding these five considerations, individuals can better personalize their strategic asset allocations and positioning for 2024 and beyond.