Wealth Outlook 2024 - Slow then grow

40 Wealth Outlook 2024 | Portfolio views Core portfolios could be ready to shine 2: Bonds anchor returns and seek to mitigate portfolio risk We began to emphasize the improving value of bonds last year. With rates moving even higher in mid-2023, we acknowledge that our initial enthusiasm came a bit early. But now with higher yields, significantly lower inflation and the interest rate hiking cycle peaking in the US and other key regions, we like bonds even more for 2024. While we cannot be certain of the Fed’s actions, historically, the periods following the end of hiking cycles have seen strong investment returns, especially for longer duration Treasurys ( FIGURE 3 ). Looking at the portfolio risk equation, high-quality fixed income may help to lower overall portfolio volatility. Leaving 2022 (and 1969 and 1931) aside, such assets can usually be counted on to deliver positive returns exactly when needed – during periods of severe market stress associated with equity drawdowns. Going forward, given compelling valuations and peaking policy rates, fixed income can once again play both parts of its role, delivering attractive returns while mitigating portfolio risk. 3: Within equities, diversification is a benefit Beyond diversifying among stocks, bonds and alternatives, it is also important to diversify within asset classes – especially equities. This means diversifying geographically as well as across sectors and market capitalization. Here is an interesting data point to consider: the UK and Brazilian domestic equity markets currently each have approximately a 1%weighting to the information technology (IT) sector. When you compare that to IT’s recent 22%weighting in the global equity benchmark, —When thinking about the importance of diversification in equities, consider that the global equity benchmark currently has a 22% weighting to Information Technology. The UK and Brazilian stock markets each has a 1% weighting . it is easy to see how a more intentional regional diversification could help to temper losses the next time a “tech rout” has other global investors seeing lots of red. In a similar vein, no one knows exactly when EM equities will again start outperforming developed equities, or when US small caps will go on their next streak – but by maintaining a well-diversified equity portfolio investors can increase the probability that their results may eventually benefit from rallies as they occur. After all, to keep your core portfolio as your bedrock requires professional guidance to search for investment opportunities that leaves no country unexplored and no stone unturned. ¹ Theequitymarkets refer to the following indices inUSD:MSCIUnited Kingdom Index, MSCI Brazil Index andMSCI ACWI Index, respectively A cash conundrum Holding excess portfolio cash that greatly exceeds levels needed to meet unexpected expenses may be seen as tempting in turbulent times, but the feeling of security it conveys can be transient and costly over time. As our new 10-year Strategic Return Estimates have risen over the last two years across all asset classes, we are bullish about the long-term investment landscape. We are therefore encouraging clients to follow asset allocations based on their risk profile and consider adding to long term core portfolios as appropriate.