Welcome to the last edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated. We aim to help investors cut through all the media noise and hype and understand what is really driving investment markets and portfolio returns.
In this edition we cover:
- Outlook for 2024
- The cash conundrum
- The risk trade off
Outlook for 2024
Looking ahead to 2024, global growth has been more resilient than anticipated over 2023, with inflation falling in most major economies. While the risk of a global recession has moderated this year, we do still expect economic growth to slow in early 2024 as the full impact of the rising interest rates is felt around the world. However, falling inflation could allow USA central bank to ease rates as the year progresses, setting the global economy up for a good recovery mid to late 2024. Shares and property would benefit from rate cuts.
As we head into 2024, AW see good options for portfolios: bond yields are high, equity valuations are fair, private markets continue to offer good results, while also becoming more accessible to investors. Even cash doesn’t look so bad. After negative share market returns in 2022, sideways moving share markets in 2023, we look forward to rising share markets in 2024 and 2025.
At a 5% yield, cash can’t be ignored. But, it doesn’t tend to work best in the environment we see moving forward. Cash works pretty well when central banks have to hike more than expected and when inflation expectations are moving higher – as we saw over the last two years. But today, few are still debating whether the USA Federal Reserve will hike another time. The focus, rather, has decidedly shifted to when – and by how much – the USA Fed will cut rates next year.
Consider this, the market is pricing in a 60% chance of the USA Fed cutting rates by March…and a 100% chance that it does so by May. In all, investors think we’ll see 1.25% worth of cuts by December. This might be a bit too optimistic, but one thing is still clear: rates are headed lower. At the same time, earnings growth expectations on shares are improving and risk sentiment is recovering. This means cash comes at a greater cost in this next stage of the cycle. Be clear on how cash fits into your goal-aligned wealth plan.
The amount of risk you take in your portfolio will determine your return. Cash is a less volatile investment vs shares, on the other hand, will have periods of above average returns and periods when they fall in value. This trade-off between risk and return is not just theoretical, it is possible to observe it in real life.
Let’s consider 3 different portfolios:
A) 100% cash
B) 50% cash and 50% shares (a balanced-style portfolio)
C) 100% shares
By looking at these 3 portfolios where the cash rate is 4%, and the return from shares varies from 12% (good year) to 8% (average year) and -10% (poor year), we can see the way returns are linked to the amount of risk, in this case exposure to shares, taken on by the portfolio.
Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.