Investors faced a number of challenges and prospects globally, marked by central banks grappling with inflation, geopolitical tensions in Europe and the Middle East, and the emergence of transformative technologies.
Market movements during 2023 were dominated by the ‘Magnificent Seven’ which helped the tech-heavy Nasdaq index rise close to 47% on the year.
But the market has become more stretched, with some companies winning while others are in the doldrums. Although there is no guarantee this will change in 2024, it does mean there are now unloved opportunities for those that know where to look, according to fund managers.
Mark Barnett, manager of TM Tellworth UK Income & Growth, said the obvious place to look is the home market, pointing to recent data suggesting a more positive outlook including declining inflation and robust wage growth, which signal an impending shift towards 'real' wage rises.
Turning to politics, he said: "Even within the UK political arena, our next election (almost certainly in 2024) offers a choice between two parties that are largely pursuing similar policies to tackle the major issues facing the country, and although the constant political noise is aggravating, it's also not unique to Britain."
Jacob Mitchell, chief investment officer of Antipodes Partners, also noted prevalent challenges such as elevated taxes and sluggish growth but there were also encouraging indicators.
He predicted a faster decline in inflation, fuelled by reduced import costs and a cooling labour market, adding that "current equity valuations imply the market is pricing in a hard economic landing”.
"However, we believe the UK's economic fundamentals do not support such an outlook and that investors can find enticing opportunities in the UK, including Diageo, NatWest and Tesco, which are all now priced at attractive levels,” he said.
It is not just at home where there are bargains to be found. Globally there are cheap stocks everywhere, even in the US, where the market has been resilient, Neil Denman, portfolio manager at Sarasin & Partners, said.
He advocated investing in attractively valued, established companies such as Texas Instruments (TI), which he argued has the potential for strategic expansion and provides impressive dividend growth.
Denman said: "TI currently offers a 3.4% dividend yield, which has grown by a compound rate of 13.8% over the past five years. We are extremely happy to collect this attractive dividend and wait for the longer-term thematic thesis to play out.”
Investors may want to look one country to the north, according to Greg Eckel, portfolio manager of Canadian General Investments plc, who highlighted the country’s stable financial system, prudent fiscal policies, abundant resources, and relatively calm geopolitical environment.
Turning to alternatives, Rich Hill, head of real estate research & strategy at Cohen & Steers, noted a significant price adjustment in listed REITs since their peak in 2021 could make them now an opportune time to invest.
Listed REITs have suffered considerable headwinds, marked by a 30% dip from their 2021 peak, yielding a loss of 24.4% by November 28, 2023.
Hill remains cautiously optimistic: "By comparison, if real rate rates decline to 1.5% as the Federal Reserve continues to control inflation, while net operating income growth slows to the mid-3% range and credit spreads are unchanged, then we see potential for returns in the teens.
"We think a harder economic landing where real rates fall towards 1% while credit spreads widen, and growth slows could produce positive returns for REITs given what is in the price. The risk is interest rates remain higher for longer."