Last year was quite difficult for investors, as central bank policies affect the dynamics of business development and investment. In 2023, central banks actively raised interest rates and tightened monetary policy to fight inflation. This year, many market players expect monetary policy to ease. If the bottom has not been reached, then at least we are in the process of recovering from the crisis, an economic downturn caused by the high cost of money.
How to plan your investment activity, taking into account current realities and forecasts? Let's take a closer look at several major asset classes.
At the end of 2023, index funds reached their peaks. There are several reasons for this. They proved resilient to macro risks, but everything comes at a price: investors had to pay for absolute returns with record low diversification, where the share of the seven largest companies exceeded a quarter of the index. The markets also grew due to the focus on artificial intelligence, with such topics as the emergence of ChatGPT, Bard, and others driving growth in the most capitalized companies in the IT sector. Ultimately, due to the high weight of these companies in stock indices, this led to the growth of the indices themselves.
One of the reasons for the growth of stock indices is the strengthening of a separate cluster of mega-high-capitalization companies. In 2021, they were called FAANG; in 2023, the investment community began to call them Magnificent 7 (Amazon, Apple, Alphabet, Meta, Nvidia, Tesla and Microsoft). These companies were in an advantageous position last year because they are the basis of technological progress (each in its own field).
Another reason is that the debt burden was one of the reasons for the weak growth of companies in 2023 (as interest rates rose, the cost of servicing corporate debt increased), and the largest companies have a diversified debt structure over time, so they can simply wait out the hard times.
For those who want to invest in stock indices, we recommend doing so no earlier than April or May, when the traditional downturn is expected. Definitely not after the Christmas holidays, as the New Year's rally was quite aggressive. If you want to invest your free resources in liquid assets, it is better to rely on stock picking—investing in individual stocks.
The selection of specific companies and businesses plays a crucial role. Based on our vision for 2024, we consider buying stocks with so-called quality/defensive profiles. This portfolio includes companies that primarily have a low or moderate debt burden, high liquidity and stable cash flows.
In addition, such companies pay higher and more stable dividends compared to the market and find new capital inflows in times of market stress. Companies with high margins and reliable revenue streams continue to be able to grow profits despite a more difficult operating environment.
The main problem with debt instruments in 2023 was a lack of diversification: after a 20-year break, bonds are once again correlated with equities. The growth of debt markets in the last quarter primarily restored market participants' confidence in the investment prospects of this asset class, while not putting an end to the bear market. In terms of risk-return balance, short-term debt instruments continued to hold high shares in institutional investors' portfolios in the fourth quarter of 2023. We believe that 2024 should create favorable conditions for the growth of debt instruments, from corporate to high-risk.
Gold deserves special attention in this category. During 2023, when the average commodity market fell by 7%, gold rose by 14%, despite rising real interest rates and a strong US dollar. Historically, these two macroeconomic factors have led to a decline in the value of gold. This precious metal was in demand from global central banks. For example, China's central bank actively bought physical gold, which increased local prices relative to the global market. This year, gold remains an attractive investment asset.
Investing in business expansion and raising capital
We expect that the third and fourth quarters of 2024 could see a major recovery in the IPO market. In anticipation of the economic situation stabilizing, some players are actively preparing for public capital raises. In our experience, the number of IPO deals is currently higher than ever. Investors are very open to communicating with potential candidates for IPOs.
No matter how strange it may seem in the current circumstances, now is a good time to build your own business—expansion, geographic expansion. Available labor resources: many people of different specialties have appeared on the market, including underestimated high-class professionals. Favorable conditions for M&A: if you have free resources, it's time to use them to take over a competitor that is going through difficult times or a new small business that will open the door to a promising niche. It's better to use your own resources for this, as borrowed ones are quite expensive.
We are optimistic about 2024, as the upcoming elections, as well as covert liquidity injections, could provide significant support to any bear market, as we saw in mid-2020. 2024 will be a favorable year for debt and commodity instruments, bring a lot of volatility to the dollar and cryptocurrencies, and be a real test of strength for stock indices.
Prepared in co-authorship with Ilya Kyslytsky, Head of Research at Blackshield Capital