Smart Alpha: The outlook for 2024

The team’s research informs the stock selection of the active ETFs that underpin the Smart Alpha portfolios. Nutmeg is then responsible for the ongoing management of the portfolios, setting the constraints on asset allocation and risk.

Too early for a ‘soft landing’ victory lap

Having entered 2023 with fears of 1970-style stagflation, western economies have so far coped remarkably well with higher interest rates (above 5% in both the UK and the US).

As discussed by the Nutmeg investment team in its outlook for 2024, the rate of inflation in major western economies is widely expected to continue easing in the coming months (though this is far from guaranteed). As such the market narrative has shifted towards the prospect of a ‘soft landing’ – where global economic growth slows down, but not to the point of recession.

The UK Consumer Prices Index (CPI) came in at 4% in the 12 months to December, which was higher than the 3.9% recorded in November, but still significantly lower than its peak in this cycle at 10.5% in December 2022. In the US, CPI was 3.1% in November, having peaked at 9.1% in June 2022.

However, while both equity and bond markets have been lifted recently by speculation around potential rate cuts in 2024, J.P. Morgan Asset Management is urging caution against “taking a victory lap too early” given how hard it is to forecast the direction of economies. 

Given how monetary policy changes – meaning interest rate moves by central banks – can lag in terms of real economic impact, the view is that it may be too early to sound the all clear on the economic outlook.

J.P. Morgan Asset Management is overall cautious about the idea that economies can easily cope with interest rates of 5% or more in the US and UK, and 4% in the eurozone. Given the aforementioned lag, the real impact of higher interest rates could become increasingly evident in consumer and business spending data in the coming months.

Despite the recent general downward trend in inflation, the team’s view is that interest rates could be set to fall later than the market expects - which is currently in the spring. The suggestion is that central banks should be wary of cutting without a significant slowdown in economic activity.

Will we see more government spending?

One factor that the team believes has been cushioning the impact of higher interest rates is ongoing expansionary fiscal policy. This involves increasing government spending or cutting taxes to try to starve off a potential recession.

In the US, post-pandemic suspensions on student loan repayments persisted into 2023, while multi-year, multi-trillion dollar stimulus programmes were introduced in areas such as technology and clean energy. 

In the eurozone, the key fiscal package is the European Union (EU) Recovery Fund, though this is only slowly being put to work.

Spending programmes such as these are a tried and tested way for governments to support economic activity, though attention will soon turn towards balancing the books.

J.P. Morgan Asset Management said: “A 6% budget deficit in the US at a time when unemployment is near a record low is simply not sustainable, particularly given the central banks are no longer buying government debt. A deficit at this level would also suggest that whoever ends up running for president in 2024 will not be doing so on the promise of major tax cuts.”

A word also on China: while the government there has also announced a number of stimulus measures, none equate to the large-scale programmes of the past. China has a number of difficulties in areas such as real estate, and the tech sector, and so the absence of strong stimulus doesn't help matters, with the giant economy likely to grow at much lower levels than in recent decades.

Navigating geopolitical uncertainties

Beyond the macro concerns the world is dealing with, there are also numerous political and geopolitical uncertainties the world is dealing with this year. This includes the conflicts in the Middle East and Ukraine which have the potential to deliver further commodity price shocks, as well as the sad realities of a humanitarian disaster. 

There’s also some significant political elections set to take place this year, at home in the UK and abroad. We have already seen a significant vote in Taiwan early in the year, with pro-sovereignty candidate William Lai elected as president. China has ramped up its military presence around the island in recent months, with tensions rising of a potential conflict.

The US presidential election in November will no doubt have huge ramifications across markets, while this year will also see polls open in India, and for the European parliamentary elections.

J.P. Morgan Asset Management said: “2024 is a big year for national elections, with more than 40 nations scheduled to go to the polls. This includes four of the world’s five most populous countries, and in total elections are set to cover over 40% of both the world’s population and GDP.”

Asset class views

Smart Alpha portfolios are overseen by the Nutmeg investment team, but tactical adjustments to allocations are informed by the research of the J.P. Morgan Asset Management team.

One asset class that the latter are keeping a particularly close eye on is developed market government bonds, especially US treasuries, particularly given recent volatility in yields (income) that has been swayed by rhetoric on interest rates. The 10-year US treasury rose above 5% in October for the first time since 2007, though has since fallen back to around 4% as of January 2024.

The team at J.P. Morgan Asset Management said: “In 2024, we feel more confident that both short and long-term interest rates have peaked and that investors should take the opportunity to lock in yields on high-quality fixed income.

“While bond markets are likely to remain bumpy, core bonds offer attractive income levels for investors and also potential capital gains.”

This focus on ‘higher quality’ also informs the team’s positioning within equities where the strongest conviction has been on stocks of companies with robust balance sheets, proven management teams, and a stronger ability to defend profit margins.

The team added: “Corporate margins are a key focus, as firms are unlikely to have the pricing power they did in times of bumper consumer demand.”

Why invest in Nutmeg Smart Alpha portfolios?

Smart Alpha aims to offer a best of both worlds approach, with a powerful combination of elements of both active and passive investing. They pair Nutmeg’s core investment principles, ETF and fractional investment expertise with the in-house, multi-asset knowledge and experiences of one of the world’s leading investment houses.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.