Global investment company abrdn says the potential for a mild recession in late 2024 in the US, coupled with elections in the US and elsewhere may lead to increased polarisation and endanger globalisation, requiring investors to stay vigilant and nimble with their equity investments.

Irene Goh, deputy global head of multi-asset & investment solutions at abrdn, expects greater volatility in stock markets this year given greater geopolitical and economic risk. Elections are being held in many countries, with Americans heading to the polls in November 2024 to elect the next US president. On top of war in the Middle East and Ukraine, this has added to global economic uncertainty and may bring greater volatility to equity markets.

“Investors are less worried about sticky inflation, more about politics and elections as their top concern this year,” said Ms Goh, who helps manage multi-asset funds for abrdn.

“Ahead of the November US election, Donald Trump holds a lead over Joe Biden in national polling in the swing states. But much will ride on Trump’s legal battles and the perceptions of the economy at the time of the election. Either way, a Trump victory could bring about a jump in volatility given how polarising he is not just in the US but across the globe,” she said.

On top of geopolitical risks, economic challenges remain. abrdn expects slowing growth, moderating inflation, and falling interest rates over the next 12 months, but the soft landing probability has risen quickly due to supply side improvements.  

“The rather even keel of scenarios tilting one way or the other, combined with a heavy geopolitical agenda for 2024, means market volatility will sustain. Markets will swing between moderating to lower inflation supporting equities versus slower growth raising concerns and leading to a contraction with a drag on equities.

Equity: favour the US and the tech sector; Australian shares deliver stable income

“On equity regions, we continue to favour the US and the tech sector but given the strong rally we witnessed last year and the resulting impact on valuations, we prefer to add to technology exposure through more diversified plays, such as via Korean and Taiwan equites. We expect Japan to do well benefitting from a shift in corporate behaviour that places strong emphasis on profitability and returns excess capital to shareholders. Within the region the other market that we continue to be optimistic about is India as we expect the country to deliver one of the strongest economic and earnings growth in the region. Finally, despite recent headwinds, equity valuations in China are reaching attractive levels. Unexpected monetary or fiscal policy stimulus could lead to a tactical rebound in Chinese equities.

“We are allocating to Australian equities which aren’t as fully valued and are producing stable income without as much volatility as the equity market overall. We like the fact that Australian shares also offer franking credits, which increases their appeal to investors seeking income,” she said.

Fixed Income: overweight amid attractive yield level; adding Australian investment grade credit

The outlook for fixed income is favourable with bonds offering greater yields as interest rates have risen. abrdn is recommending clients allocate more to investment-grade credit and listed alternative assets to help offset volatility and diversify investment risk, as well as to reap regular income.

abrdn has been building back positions in interest rate sensitive fixed income from low duration bond exposures including floating rate notes and senior secured syndicated loans which protected the portfolio against last 2 years of bond selloff. Fixed interest bonds going forward will allow investors to benefit from current higher interest rates and capital gains when Fed starts easing policy.

“We are also allocating more to Australian investment grade credit, with a preference for higher quality over high yielding corporate bonds. Investment grade bonds offer attractive spreads to enable investors to achieve much lower volatility than the equity market while still getting similar levels of income.

“We’re building an overweight position in fixed income as there’s every reason to think that over the next 12 months, we’re going to see duration do well and interest rates finally fall. We don’t like low grade corporate risk and have an underweight in high yield corporate bonds. We like US investment grade because balance sheets are quite healthy even if earnings have tapered off,” she said.

Listed alternatives: a useful source of diversification

“Listed alternatives offer growth and income sources that are insensitive to typical economic cycles and equities and bonds. They help generate stable income distributions at much lower volatility. Listed infrastructure such as renewable infrastructure, for example, offers attractive and reliable yields with links to inflation while some property investments such as student housing can offer attractive, reliable, and uncorrelated streams of income.

“Over the last two years, the equity and fixed income markets have moved in tandem due to increased cross-asset correlation, resulting in heightened volatility for multi asset funds.

“A meaningful allocation to listed alternatives in our Australian portfolios have not only helped improve fund performance in this environment, but also a useful source of diversification, ensuring our funds remain resilient amid market uncertainties,” she said

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