Fixed income and short-dated corporate bonds are the most attractive areas for investors in 2024. Investors betting on a rapid decline in interest rates will be disappointed. Also growth companies will face challenges, as venture capital is now expensive.
For investment markets, 2023 was marked by both the uncertainty and the opportunities brought about by a rise in interest rates. Good returns from the fixed income market came as a surprise to many, and 2023 turned out to be a year with really big moves in interest rates. Our view is that this was not an anomaly and that this year will continue in a similar manner. So, 2024 is starting with brighter tone than last year.
I have noticed that many people are expecting a clear drop in interest rates and the turnaround that typically accompanies it, but I don’t fully believe it to be the case. At Evli, we expect inflation to come tumbling down and central banks to no longer tighten monetary policy, but rather to start cutting interest rates in 2024.
While the euphoria about a return to the negative rate era is boosting the fixed income market, I myself am quite cautious about it. Even if interest rates do not go higher from here and policy rates are cut, the world is still full of debt that needs to be refinanced. At the same time, as economic growth further slows, there is a high risk that it will be more expensive to refinance and that the cost of debt will be high. What this means is that lower interest rates in 2024 will not significantly help businesses.
For those with an eye on fixed income, I recommend to look in particular at short-dated corporate bonds this year. Their coupons provide steady returns and they have high yield levels. If everything stays the same, it is possible to get a steady return of 6%. If you have the courage to invest in high-risk corporate bonds, the yield prospects are clearly even higher. Last year, high yield bonds returned more than 10% after expenses, and I cannot rule out that the same could happen this year. If you are not already strategically weighted towards fixed income, you should do so in 2024.
The market for growth stocks will still be challenging
The risks remain high in the market for growth stocks in the current year. At the Slush event, we saw renewed optimism, but growth companies still face challenges in this new rate environment. There are many factors showing that not all is well right now. For example, there is a clear shortage of venture capital and the valuations on companies have been falling. The situation is particularly challenging for companies that are constantly burning funds, i.e. they are strongly EBIT negative. We will see further disappointments in this market during 2024.
This year also offers opportunities as the multiples will be clearly lower. Of course, it is good to remember that this is part of the market dynamics for growth companies. Investors should always remember a long-term perspective and healthy diversification.
Finland among the worst Western countries – although private debt and infrastructure are interesting
In 2024, investors should remember to own the risk and a certain uncertainty that the global situation will inevitably bring. When you don't know what will happen, you have to own the risk. That's how you get the returns. If you look at the last year, the diversified global portfolio has produced good returns. At the same time, I would say that it is wise to take a position outside of Finland. Unfortunately, the situation here is a bit bleak, and Finland has been one of the worst performing stock markets in the West last year.
In alternative investment products, I recommend looking toward private debt and infrastructure. Infrastructure and private debt, i.e. unlisted debt, have clear value at the moment. The value in private debt, for example, is now significantly greater than it has ever been in its history.
We are more cautious about real estate investments at Evli, but they are not necessarily bad in the long run. A well-managed real estate portfolio is like a long duration fixed income investment with a stable cash flow. Over the last year, property yields have risen and the worst of the fall in values seems to be behind us. Real estate also provides a good hedge against inflation, should inflation pick up again at some point. In particular, we see that commercial property, logistics and care properties are interesting at the moment.
