2024 to provide opportunities to put cash back to work says Capital Group

Stocks and bonds should be a good bet for long-term investors this year

2024 to provide opportunities to put cash back to work says Capital Group
Steve Randall

Cautious investors who opted to build up cash reserves rather than risk the markets in 2023 should be tempted back to stocks and bonds in 2024 according to Capital Group.

In its 2024 outlook the investment manager sees opportunities for long-term investors given easing inflation and the Fed signalling that it may be nearing the end of its tightening cycle, which has historically proven a good time for investors to jump back into stocks and bonds.

In Canada both Canadian and global stocks and bonds have on average outpaced Canadian 3-month treasuries following Bank of Canada rate hikes over the last 30 years.

“We’re on the cusp of a major transition where long-term investors can find attractive investment opportunities in stocks and bonds,” commented Mike Gitlin, president, and CEO of Capital Group.

While it’s not expected that interest rates will plunge to the lows we have become used to since the financial crisis more than 15 years ago, Capital Group’s fixed income portfolio manager Pramod Atluri believes yields may hover in the range of 3.5% to 5.5%, which were considered normal in the pre-financial crisis era.

While the run-up in rates could weigh on markets, investors will likely adjust. When 10-year rates were 4.0% to 6.0%, the average annual return since 1976 for the S&P 500 Index was 10.41%, while the Bloomberg U.S. Aggregate Bond Index returned 6.55%.

On the thorny subject of recession, the outlook suggests that a rolling recession, especially in the U.S., is likely. This will mean different economic sectors experiencing downturns at different times and the avoidance of a widespread traditional recession.  

Uncertainty remains

Despite some positive vibes, Capital Group’s chairman and CIO Martin Romo, notes that the outlook remains uncertain.

But while many opine about the direction of inflation and rates and the risk of recession, Romo says he prefers to take a long term view, the equivalent of considering changing climate rather than just the weather forecast.

Romo, who is PM for the Capital Group U.S. Equity Fund (Canada), sees some big trends that are set to shape the investment landscape over years and decades, and says there are several questions currently being asked:

  • How will rapid advancements in artificial intelligence alter the way companies do business? And which companies are positioned to win the AI race?
  • Will electricity, wind and solar power displace fossil fuels as our primary source of energy? And how long will that process take?
  • In the bond market, with U.S. Treasury yields near 16-year highs, are we at the start of a historic opportunity as real income returns to the fixed income universe?
  • Will rising government debt levels lead to lower economic growth rates?
  • How might worsening tensions between the U.S. and China affect global trade?
  •  What is the risk that wars in Ukraine and Israel will spill into wider fields of conflict?
  • And, in a pivotal election year, will market volatility keep nervous investors on the sidelines?

Dividends gain importance

Earnings are set to be more favourable in 2024 compared to last year and Capital Group’s equity portfolio manager Diana Wagner believes that dividends may take a more prominent role in

driving total returns for investors.

“It is difficult to know when a cycle will turn, so investors may want to look for companies with

growth potential but also businesses that pay dividends, which can help mitigate market

volatility,” she said.  “Valuation is important, but it is essential to distinguish between real values and companies with deteriorating business prospects.”

Dividend payers can offer investors diversification as well as income for those investors that may be concerned about their tech-heavy portfolios.

Further insights are included in the full outlook