How to invest like a pro in 2024

Inflation is easing and there are signs that interest rates may have peaked, so could 2024 finally bring some good news for investors?

Many who retreated into cash in 2023 are braving the markets once again as economic data brightens. Markets recovered strongly in November as investors funnelled £449m into stock market funds after six months of relentless selling, according to Calastone, a global funds network.

However, we are not out of the woods just yet. Professional investors expect global economic growth to slow in 2024 as ongoing geopolitical crises continue to stoke volatility. Although interest rate cuts are expected about halfway through the year, it will be a long time before we see the return of the ultra-low borrowing costs that companies and households became used to.

We asked fund managers and investment analysts how they would navigate this challenging landscape as we head into 2024.

Bonds are back

Ask any asset manager and the chances are they will tell you that 2024 will be the year of the bond.

Following the worst ever bond market in 2022, investors flocked to government and corporate bonds last year. Now, as economic growth slows, interest rates are expected to fall and inflation eases, the returns investors can get on fixed income assets are looking very attractive.

The asset manager Vanguard now expects British bonds to return an annualised 4.4pc to 5.4pc over the next decade, compared with the 0.8pc to 1.8pc annualised returns expected before interest rates began to rise.

Eren Osman of the private bank Arbuthnot Latham said: “Even for higher-risk investors who have historically focused on the stock market, we would encourage them to shift a meaningful proportion of their capital into gilts.

“In addition to the prospect of attractive returns, gilts now carry less risk than at virtually any point in the past decade.”

Investing in gilts – bonds issued by the British Government – also carries a tax advantage. Although income tax is due on interest earned from gilts, any capital growth is free from capital gains tax.

Darius McDermott of Chelsea Financial Services, an investment shop, said now was the time “to lock into some good yields for the longer term”. He recommended holding relatively little cash but plenty of government bonds.

“Investors can also benefit from a robust bond market by holding more general fixed income funds that contain a spread of different bonds. Such funds include Aegon Strategic Bond and Nomura Global Dynamic Bond,” he added.

Luca Paolini of Pictet Asset Management said: “Investors in most government bonds from developed nations, especially the US, can expect positive returns after inflation this year. We also see potential in emerging market bonds and in high-grade corporate credit.”

Will American stocks continue to rise?

In 2022, as interest rates rose, it would have been difficult to foresee the S&P 500 index of American shares approaching record highs in 2023.

Yet, after an admittedly bumpy start, the index soared by more than 20pc last year while the Nasdaq index of American technology stocks gained 40pc, thanks in part to enthusiasm over artificial intelligence, better than expected economic data and the prospect of interest rate cuts this year.  

Investment banks are divided over whether Wall Street can continue to boom this year. It largely depends on whether the American economy can avoid a recession, analysts say.

Michael Field of Morningstar, an investment research company, said the recession risk made it sensible for those who held US stocks to invest in defensive assets too.

It is always wise to ensure your portfolio is not heavily exposed to one specific region. This year, market watchers think investors will be rewarded for looking further afield.

Mr Paolini said: “The best opportunities are likely to lie in unloved parts of the market outside the US, in contrast to previous years.”

Ian Lance of Temple Bar, an investment trust that adopts a “value” style of investment, said investors should “rebalance from US stocks, which look very expensive compared to history, and look into other regions such as Britain, Japan and the emerging markets”.

Further gains from technology?

Rob Burgeman of the wealth manager RBC Brewin Dolphin said lower interest rates were likely to benefit “growth” stocks such as technology companies.

“The so-called Magnificent Seven – Alphabet, Amazon, Apple, Microsoft, Nvidia, Meta and Tesla – have dominated S&P 500 returns, while others in tech have continued to struggle in the face of higher interest rates. That could be about to change this year as interest rates go into reverse and some of the longer-term tech plays come back into fashion.”

For exposure to the sector globally, he recommended the Polar Capital Technology Trust.

“The fund includes the big US players among its holdings but also offers exposure to smaller tech stocks and companies from other parts of the world, such as Taiwan Semiconductor Manufacturing Company,” he said.

“However, the trust charges performance fees, which can make it an expensive choice. Alternatives include Allianz Technology Trust and BlackRock’s Next Generation Technology Fund. The former includes many of the same names as the Polar Capital trust, while the latter has Nvidia and Tesla among its top holdings alongside a number of less familiar names such as Lattice Semiconductor.”

Think defensively

Investing for income is one way to protect yourself from high inflation.

Keith Bowman of the stockbroker Interactive Investor said companies that offered attractive dividend yields had “remained in the sights of investors” during 2023.

“Seven of the 10 most bought companies currently offer a yield of more than 4pc and four of them – Aviva, L&G, Glencore and Vodafone – yield more than 7pc,” he said.

This year is likely to see continued volatility and so investors should explore sectors that can fortify their portfolios even in risky markets. Mr Field said healthcare was one of his sectors of choice. There are high levels of innovation in oncology and immunology, he said, and companies in these areas traditionally have strong pricing power.