They are:
Income investing – with attractive yields available from both equities and bonds, a focus on income is likely to benefit investors in a low growth world.
UK equities – low relative valuations combined with the ability to invest globally through many UK stocks makes this area especially compelling.
Fixed interest investments – with yields at appealing levels and the potential for capital uplift too, fixed interest has once again become an investible asset with diversifying qualities.
Individual structured products – an element of capital protection and the ability to achieve positive returns in flat or sideways markets makes these a great addition to traditional portfolios.
Commercial property – improving fundamentals for selected areas of the property market combined with very attractive income yields could reap significant benefits this year.
Income investing
As we look ahead in 2024, it’s hard to recall a time in the recent past when the market outlook was so uncertain. Recession or soft landing; inflation, disinflation or stagflation; peak interest rates with pending cuts by central banks, or ‘higher for longer’? With headlines filled with geopolitical tensions, wars in Europe and the Middle East, as well as spiralling government debt levels, 2024 is further complicated by also being a major political election year.
In a world where there are clearly more questions than answers, a focus on income investing (where ‘slow and steady’ tends to win the race) is a genuinely exciting opportunity for investors.
After a decade of quantitative easing (QE), which resulted in an extended period of abnormally high returns, investors are currently facing the likely probability of a lower return environment, exacerbated by elevated volatility. Being able to capture all/most of the total return via income is highly appealing and should offer welcome ballast to investors’ portfolios.
The market tends to underappreciate dependable income streams from equities. Typically, these businesses are more defensive in nature and their income is often uncorrelated with the broader macroeconomic environment. Ultimately, the opportunity today relates to focusing on higher quality businesses, often mature ex-growth with robust balance sheets. As such, this type of company is less inhibited by rising interest rates, able to withstand a slower economic environment, and tends to generate excess cash flows that enable returns to shareholders via a dividend.
In the other half of the multi-asset portfolio, bond yields today, even after the ‘everything’ year-end rally, remain attractive. Again, with an economically uncertain backdrop, the focus should be on higher quality credits that offer a competitive yield. Sovereign debt, now that the enormity of the QE-fuelled bond buying programmes has all but finished, is also offering both income and portfolio downside protection, should markets take fright to a deterioration in news flow.
In a world of uncertainty, multi-asset income currently provides an attractive stable income with an eye on capital return, acting as the ballast in a client’s portfolio due to its lower level of volatility.
UK equities
UK equities have traded at a wide and persistent discount to broader global equities for several years now. A well-diversified index, paying an attractive dividend yield, filled with globalised businesses that often have very little dependence on the domestic economy is seemingly not enough to lure in buyers. What the UK market needs is a catalyst to get share prices moving in the right direction.
Fortunately, we see plenty of catalysts for UK equities. Firstly, companies are buying back their own shares at record levels. According to data from Redburn, UK companies are buying back around £200 million of shares a day, equating to £50 billion a year. These management teams know their companies better than anyone and their confidence is reassuring. Buying back stock is effectively a form of shareholder distribution, enhancing the attractive returns already available from dividends.
It isn’t just management teams that think their shares are cheap; competitors and private equity do too. Indeed, we are seeing an increasing number of businesses being bid for by a range of different entities. These offers can often involve significant premiums to the prevailing share price. The best example last year was Mars, which offered to buy Hotel Chocolat at a 170% premium to the previous day’s price, a sweet deal for shareholders!
The low valuation of UK stocks appears to have worked its way up the Chancellor’s agenda. We believe there are several measures the Chancellor may take in the Spring Statement, such as reducing red tape and the introduction of new ISAs specifically for UK equities, all of which could provide a tailwind for the market.
UK equities present an opportunity to invest at historically low valuations, with plenty of catalysts that could deliver value over the longer term. Our UK Dynamic Fund provides an actively managed exposure to the exciting opportunity set we see in the UK, in 2024 and beyond.
Fixed interest investments
Our biggest asset allocation decision over the past 15 months has been the increase in fixed interest assets within our multi-asset funds. Exposure to fixed income within the Balanced Fund has risen from 11% in September 2022 to 25% in July 2023, where it has remained since, while our Cautious Fund now holds 36% in fixed interest investments.
Fixed income had a tumultuous 2023, as major central banks extended the interest rate hiking cycle in the face of stubborn inflation figures. Sentiment picked up towards the end of the year as data showed a sustained fall in inflation across developed markets, leading to expectations that interest rates will stabilise and perhaps even fall during 2024.
While fixed interest is an overarching asset class in its own right, it includes a broad spectrum of underlying assets including sovereign debt (gilts and treasuries), corporate bonds, high yield and emerging market debt, all of which have different risks and drivers. However, given the more attractive yields available for the first time since the global financial crisis, in addition to the opportunity for capital gains when interest rates are cut, we remain especially positive on the outlook for these instruments.
We are cognisant that these are not risk-free investments and defaults can occur. However, our positioning in both US and UK government debt, allied with investment grade bonds gives us greater protection against a company or government not being able to meet its obligations. While yields have fallen from their highs earlier last year, they remain very compelling, and we continue to see these as an important building block in portfolios.
Individual structured products
Structured products are fixed-term investments with set maturity dates that offer investors predetermined payoffs, provided a set of specified conditions are met. The payoff conditions in our fact sheets list the market performance scenarios under which the structured product will make money, as well as the scenarios under which it will lose money.
Many analysts are suggesting that the global economy will continue to recover in 2024. However, this recovery could be interrupted by global events such as the wars in Ukraine and the Middle East, and continued tensions between the US and China. 2024 is also a historic election year, with voters set to go to the polls in the US, UK and India, among others.
This potential market uncertainty means our structured products could be more appealing to investors for the following reasons:
All Mattioli Woods structured products have an element of capital protection. An investor in structured products benefits from protection of their capital unless the underlying indices fall by more than a predetermined amount. At Mattioli Woods, the underlying indices used in the structured product must fall by more than 35% when the structured product matures before any capital is lost.
They are designed to generate returns if markets rise, move sideways or fall over the life of the structured product, which adds diversification of returns to a portfolio. This low correlation with other asset classes may act as a natural hedge against losses in other areas within portfolios.
Volatile markets generate higher potential returns on new structured products with lower risk.
Structured products are not suitable for people who require access to their money invested during the term of the product.
Since 2006, we have launched 110 structured products. The average annual return on these structured products is 6.54% per annum. Only seven have returned less than the original capital.*
There is no guarantee when investing in structured products. The investment and any income generated from them can fall as well as rise.
*Source: Mattioli Woods Internal Data
Commercial property
The commercial property sector has had a difficult two years, mainly due to macroeconomic conditions rather than a deterioration of fundamentals. Rising interest rates increased the yields investors could earn risk-free with Government bonds; the rise in the risk-free rate meant the discount rate used to value the cash flows from property assets increased too, resulting in a derating in assets such as property. During 2023, the UK-listed property index returned +10% on a total return basis. However, this has not been a smooth ride, seeing highs of 14% and lows down to -13%. The Bank of England held interest rates at 5.25% in November, instilling confidence that we are close to peak rates. In the last two months, the UK-listed property index returned 24%.
2023 may have been a positive year but many investors are still sitting on losses from 2022. So how does the future look? Firstly, we know that a fall in interest rates will be a key driver of capital returns for property.
Sector positioning will continue to be important for investors. The industrial and logistics sector continues to see rental growth due to the positive supply and demand dynamics and is a sector we believe is positioned for continued growth. We do still have concerns surrounding regional offices, where demand has been weak, with more employees working from home (at least part time). Where we are seeing demand for offices is Grade A space, where employers are spending to lure employees back to the office. These are few and far between in the regions but there are opportunities to invest in Central London. There continues to be a lot of doom and gloom surrounding retail property but one bright spot is within retail warehouses. These out-of-town destinations are attractive to shoppers with free parking and a wide selection of shops. We have seen cash-rich buyers taking advantage of depressed share prices, with the acquisition of the entire Ediston Property retail warehouse portfolio at a 10% discount to net asset value, but a premium to the prevailing share price.
Source of returns: FE Analytics as at 31 December 2023
Past performance should not be seen as a guide to future returns
The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.
This article is for information purposes only. It is not intended to be an invitation to buy, or to act upon the comments made, and all investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.
