Forget the politics and be an optimist in the fundamentals

Investing requires optimism – and a long-term view. Equity markets will rally, as the reality of interest rates having peaked will improve sentiment.

Markets always look ahead – in this case at interest rate cuts, which will be a positive for global equities.

At the start of 2023, with widespread concern about investment markets, there weren’t too many expecting a strong finish 12 months later. Rising interest rates and inflation that showed no sign of being in control put a dampener on an outlook that was hard to see past.

Yet investment portfolios closed out 2023 strongly across most asset classes.

Well-conceived portfolios benefited from one factor: ­Diversification across the asset classes, and in 2023 diversification ­delivered.

This was seen not just in the final quarter as equities rallied but throughout the calendar year, when it seemed that too many investors were sitting back, comfortable with their 5 per cent yield from term deposits.

The level of US Treasury bill and cash holdings peaked in October at 15.8 per cent. The last time they reached these levels was in 2009, having almost got there in March 2020. This suggests investors did not have the confidence that we were at or near the peak in interest rates.

But I believe we are. Right now, I see many investors waiting for a significant equity market correction before adding to their risk-based allocations.

I have made the point many times that every cycle is different. As an example, there has been a significant correction this cycle – but it has been in bond markets. Bonds capitulated in 2022 and were extremely volatile in 2023.

Keep in mind that markets always look ahead. On the international front, interest rate cuts are expected around the end of the first quarter or start of the second quarter in developed markets and will be a positive for global equity markets.

Inflation is not decreasing at the same rate in Australia, which is likely to delay interest rate cuts here. This increases the risk of recession in the second half of 2024.

The ‘R’ word has been used extensively now for two years. But recession risks have fallen as economies have proved more ­resilient than most forecasts.

While the US will slow down this year, it may well avoid a recession, and mild recessions may also be evident across Europe.

The soft China economy has also been a dominant theme over the last two years. China should continue a cyclical recovery, with consumer confidence increasing, combined with fiscal support. But this will be a mild recovery and not like previous periods when Chinese authorities have aggressively stimulated the economy.

Taiwan’s President-elect Lai Ching-te, centre. Elections are scheduled for four of the five most populous nations in the world this year. Picture: Getty Images

Artificial intelligence was the big theme of 2023, and this will provide a boost to productivity.

We closed out 2023 with our tactical overweight position in risk-based assets, through diversified credit (not property debt-­related) and infrastructure. I expect our allocation to risk assets will increase this year, as we move to overweight developed market equities and emerging market equities. For the first time in more than two years we focused on mid-cap shares due to their extreme undervaluation.

Overseas, 2024 will be dominated by elections not just in the US and UK but also in India, ­Indonesia, Mexico, Pakistan, Russia, South Africa and Taiwan. Four of the five most populous ­nations in the world will hold elections this year. These countries account for greater than 50 per cent of global GDP.

Few elections in history have had a significant impact on the global economy’s general performance, but elections can affect domestic performance and lead to short-term volatility.

While the long-term economic influence of elections is overstated, the US election, and the one just held in Taiwan, are particularly significant. In the former case, this is due to the candidates likely to be endorsed and their differing stance towards reform, monetary policy and geopolitics; for the latter, it was due to the differing approaches of candidates to China and the US.

In late 2023, I attended several investment conferences in Australia, and was struck by the negative outlook of many present. I do not share this negativity.

As the full effect of higher interest rates comes through, core inflation, economic growth and corporate earnings will slow, but as I have mentioned earlier, markets always look ahead.

I do believe equity markets will rally, as the reality of interest rates having peaked will improve sentiment. We can also expect to see Australian equities lagging given the headwinds they will encounter relative to those offshore.

As a wealth manager I always concentrate on fundamentals, but investing also requires optimism – and a long-term view.

Be careful to ensure your views do not become biased or anchored to the most recent market environments. Volatility is the lifeblood of markets and managing this volatility is critical to investment strategy.

Will Hamilton is managing partner at Hamilton Wealth Managers

[e-mail]