With macro risks elevated it’s all about stock selection

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With macro risks elevated it’s all about stock selection

There are plenty of macro drivers that will create equity volatility in 2024. To succeed, investors will need to maintain a resilient portfolio.

Heading into 2024, inflation, recession, elections and geopolitical risk are all potential drivers of dislocations in the equity market. Rather than approaching this environment by making calls on growth versus value, or large cap versus small, we think that managing a portfolio that can deliver alpha despite these macro challenges is the path to success for 2024. Here’s why we’re focused on fundamentals:

Higher for longer rates will create clearer winners and losers

In the US it looks like we’ve finally reached a plateau in Federal Reserve rate hikes. But with inflation sticky and employment and growth relatively strong, the Fed may pause for longer than expected. The continued effort to keep inflation in check has a direct impact on companies.

First, there is a significant impact on demand as consumers who have worked through their savings feel the pinch of higher credit costs. This will have impacts beyond just consumer discretionary companies.

Second, the cost of doing business will stay at elevated levels. Higher borrowing costs may be particularly challenging for smaller companies that rely on short-term financing to support operations.

And third, pricing power, which has kept profits aloft for many businesses, is likely to weaken as firms find it more difficult to pass higher costs of doing business on to the consumer.

We think the biggest risk for markets is that investors are underestimating the potential magnitude of an economic slowdown. Getting back to the Fed’s 2% inflation target from current levels of economic activity without a (possibly severe) recession seems unlikely at this point. Against these pressures, the key to separating the winners from the losers will be finding companies that have resilient balance sheets and demonstrate multiple drivers for growth – not just cutting costs (Figure 1).

Pricing power, which has kept profits aloft for many businesses, is likely to weaken.

Figure 1: there’s no shortage of macro drivers in 2024

Figure 1 - there’s no shortage of macro drivers in 2024
Source: Columbia Threadneedle Investments, November 2023

US market performance will broaden outside top tier tech

A handful of tech high fliers drove most of the S&P returns in 2023, spurred on by overly optimistic dreams of an imminent AI-enabled paradise. We do believe artificial intelligence has the potential to be a transformational force for growth across the wider economy, not just in tech. But we also think the market’s timeline is unrealistic. In our view, we are more likely three to five years away from this rather than the 12 to 24 months we saw priced into a narrow group of companies this year.

The concentration in performance in 2023 has created opportunities for research-based investors, as the pool of companies within tech and other sectors likely overlooked by the market is larger. When growth comes back, we think the market will be less monolithic, with opportunities spread out more widely.

In a world where inflation is likely to be higher, investors will need capital appreciation along with income to meet long-term goals.

What about elsewhere?

Ahead of a potential slowdown, we also see opportunities to add to strategic allocations outside the US, particularly emerging markets, and in small caps – areas we think many investors are under allocated. Small caps are currently cheap for a good reason – in a recession they would be the first ones affected. But we think there are good stock selection opportunities in both small cap growth and value. Meanwhile, valuations in Europe, on a price-to-earnings basis, are more attractive than the US, but stocks may be more sensitive to macro factors and rates. Once again, careful stock selection will be critical.

When investors allocate away from cash, they’ll need dividend growers

Yields on cash and money markets are at 15-year highs and investors have flocked to these instruments. However, in a world where inflation is likely to be structurally higher, investors will need capital appreciation along with income to meet long-term goals. Cash may be offering a compelling yield now, but it will fall when central banks eventually cut rates.

Dividend stocks, on the other hand, can replace that income and also offer capital appreciation. All dividend-paying stocks are not the same, however. Finding dividend growers with balance sheets that can sustain dividend payments through more volatility is a must for achieving sustainable income.

Figure 2: finding quality companies can help drive
outperformance during recessions

(S&P 500 cumulative factor average returns, average %,
during recessions)

Figure 2 - finding quality companies can help drive
Source: Columbia Threadneedle Investments. The recession periods considered are: dot-com bubble (03/2001-11/2001), global financial crisis (12/2007-06/2009) and 2020 pandemic (02/2020- 04/2020). Green is for top five performers and red for bottom five performers. Past performance does not guarantee future results. It is not possible to invest directly in an index.

Bottom line

Next year may be a bumpy road for investors, but we view equities as long-term, strategic holdings. Without active, research-based decisions to over and underweight companies, investors are guaranteeing that they will match any losses we experience in an index like the S&P 500.

Even if investors don’t feel like they should add to their equity
allocation next year, they also shouldn’t sell on short-term volatility.
If markets do come down, investors focused on companies with
strong fundamentals will have opportunities to add to their longterm strategic positions at attractive prices.

Next year may be a bumpy road for investors, but we view equities as long-term strategic holdings.

23 novembre 2023
Melda Mergen
Melda Mergen
Global Head of Equities
Sujets clés
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With macro risks elevated it’s all about stock selection

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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