TEAM 4th Quarter Investment Review & 1st Quarter Outlook 2024 Executive Summary

Executive Summary

Volte-Face

Volte-Face: A reversal in policy: ABOUT-FACE (Source: Merriam-Webster). Volte-face came to English by way of French from Italian voltafaccia, a combination of voltare, meaning ‘to turn’, and faccia, ‘face’.

Much like the mountaineer crushing a steady climb, major developed equity markets, led by the US, continued their ascent during the 4th quarter, recording strong gains. Embracing FOMO (fear-of-missing-out) and celebrating an early Christmas present from the Federal Reserve (‘Fed’) in the form of expected interest rate cuts early next year, investors purchased $263 billion of US equity ETFs in the fourth quarter1, propelling the S&P index to its highest closing level since March 2022, and the Dow Industrials index to a new all-time high in nominal price terms.

in recent months, coincident readings pointing to a weakening inflation backdrop and a softening in the American jobs market, whilst not alarming on the surface, appear to have given the Federal Reserve adequate ‘cover’ for a path towards rate cuts next year. The collective evidence was enough to prompt Powell into stating during the 13 December Fed meeting that a rate cut ‘is clearly a topic of discussion out in the world and also a discussion for us at our meeting today’.

Financial markets had already begun pricing in a significant increase in monetary easing expectations heading into the December meeting, but Powell’s actions were a triumph for the optimists. Cue a rocket-fuelled Santa Claus ‘almost everything’ rally, led by technology and consumer discretionary in the equity space, with bonds and property also well- bid as investors have become increasingly confident that interest rates will need to be cut at an even faster pace than the Fed, Bank of England, and the European Central Bank are indicating.

Equities: Scores on the Doors (all returns in sterling terms)

Developed market equities (represented by the MSCI World Equity Index) delivered a +6.7% total return over the fourth quarter. The bellwether S&P 500 large cap index, arguably the key global barometer of investor risk appetite, delivered a +6.4% total return, for its best quarterly performance since Q4 2021.

From a technical perspective, the most encouraging aspect of the rally has been a significant broadening out in the participation of markets, sectors, and securities beyond technology and consumer discretionary. Value stocks delivered a respectable +4% on the quarter, whilst real estate investment trusts (REITS) and global small caps, both sectors that had struggled in the face of generationally high interest rates, bounced back sharply, posting +13.1% and +7.2% respectively.

European developed market equities ex-UK returned +8.3%, whilst Japan, represented by the Nikkei 225 Index, returned +6.6%. The MSCI Emerging Markets Index returned +2.8% despite the heavy anchor of China, which still accounts for almost 25% of the index.

Fixed Income: Rapid Repricing

Coming into 2023 off their worst calendar year performance in history3, bonds defied doomsday predictions for a repeat, closing the year with a strong fourth quarter on a more dovish anticipated path for rates. Expectations of early central banks cuts and tightening spreads (note: a credit spread reflects the difference in yield between a government bond and a corporate bond of the same maturity. Bond spreads are often seen as an important gauge of economic health, where widening spreads are considered ‘bad’, narrowing spreads considered ‘good') underpinned positive returns.

Commodities

Turning to the commodity sector, oil has almost fully round tripped its second half rally this year, with WTI crude closing out 2024 at c.$71 on abundant short term supply concerns. Elsewhere in the space, gold regained its allure, with the price settling at just under new all-time highs of $2,100 in nominal terms. Central banks are on pace to buy over 1,000 tonnes of the yellow metal this year. It is worth noting that these institutions once held 80% of their balance sheet in gold vs. 20% today.

We are pleased to report that on account of TEAM’s robust investment framework and process, we steadily increased our exposure to risk assets across the MPS range through the second half of the year, notably in October.

Consequently, we have participated meaningfully in the rally, all the while staying true to our principles of riding strong price trends across assets, whilst seeking out genuine diversification through cycles. Simply put, aggregate equity exposure across the MPS range is above cycle average, but we do not have our foot to the floor.

TEAM Positioning & 1st Quarter 2024 Outlook

Looking ahead to 2024, the swift and significant repricing of expected interest rate cuts, and their potential impact on asset prices, has priced in a lot of good news in a very short space of time.

The contrast in consensus expectations to this time last year could not be greater. Then, a global recession led by the US, was all but ‘guaranteed’. Now, investors are convinced a US soft landing is equally ‘certain’. A so-called Goldilocks scenario (using the porridge analogy: not too hot, not too cold, but just right), it implies inflation falling towards the Fed’s 2% neutral target without materially impacting the labour market. A look back at history suggests the odds of this outcome occurring are poor.

But it is also important to remember that bull markets can positively surprise. In this regard, we are advocates of batting averages. The good news: solid annual stock market returns tend to cluster. We look-back at S&P 500 index returns to 1928 to identify when large index returns were followed by concurrent large returns. Surprisingly, it happens more frequently than one would expect, with 16 separate clusters representing 40% of all annual returns over the period.

We enter 2024 positively positioned from a risk perspective, with (broadly) overweight allocations to equities and bonds and underweight to alternatives and cash. Our asset allocation for the core TEAM MPS multi asset range is shown relative to neutral weightings in the table below:

Equities: modest overweight

We retain a healthy split between US and non-US equity securities, with a skew to large-cap companies.

In a world where the cost of financing remains disproportionately high (read: ‘painful’) for smaller companies, bigger is better. Large cash balances are earning meaningful interest income, which is finding its way to bottom line profits.

Separately, regarding US technology trends, whilst we claim no edge in picking the eventual winners in the AI space, it is hard to argue against big tech companies winning via organic or inorganic (acquisition) means. We have a modest exposure to small cap and zero to micro-cap companies.

Japan and India remain our highest conviction single-country exposures.

Fixed interest: overweight

Our preference at this juncture within TEAM’s fixed income sleeve is for:

1. investment grade corporate bonds that continue to offer decent compensation even in a period of still-elevated inflation. The higher yields also enable investors to be more disciplined over credit selection and still pick up attractive returns.
2. emerging market sovereign bonds based on peak policy rates, attractive real yields, and valuations.

3. Our sense is that longer dated government bond prices have moved a long way of late, and potential negative inflation surprises are still possible, particularly in the UK.

Alternatives and Cash: underweight

Physical gold and gold miners were mainstays of TEAM’s alternatives sleeve in 2023 and remain essential portfolio insurance. Gold’s performance last year should still be viewed as resilient in the context of the US monetary tightening cycle.

This can largely be attributed to record central bank buying of gold in recent quarters, triggered seemingly by a reaction to America’s decision in late February 2022 to freeze Russia’s foreign exchange reserves. As a result, global central banks bought a record net 1,082 tonnes of gold in 2022 and a net 800 tonnes3 in the first three quarters of 2023. It is worth noting that these institutions once held 80% of their balance sheet in gold vs. 20% today.

As for the energy commodities basket, and oil in particular, we noted during our fourth quarter commentary that a range of technical factors would likely create tough resistance for WTI crude oil at $100, which came to pass. Coming into 2024, the Saudi’s have almost single-handedly held the market up, whilst OPEC is sitting on approximately two million barrels of spare capacity, weighing on the market.

In a nutshell, the outlook is less bullish, but with that said, exogenous shocks, particularly of a geopolitical nature, are not out of the question. Energy equities continue to offer genuine asset and sector diversification.

Rather than attempt to look around corners and predict outcomes, we rely steadfastly on our systematic investment process, which has successfully navigated an array of market conditions over the prior three years and delivered respectable risk-adjusted returns for our investors.

What is certain is that 2024 is sure to be another fascinating year for markets.