Diversified investors to be rewarded in 2024

Vanguard’s annual market and economic outlook report for 2024 has highlighted an impending “structural shift” set to introduce more long-term positivity and rewards for diversified investors.

The report titled A Return to Sound Money anticipates the most resilient economies in 2023 to feel the pinch as monetary policy takes effect.

“Vanguard has heralded the return to ‘sound money’ for a while now, with signs signalling the beginning of a ‘higher interest rates for longer’ era and the unlikely return to zero rates,” Vanguard Australia’s Senior Economist, Alexis Gray, said.

“But investors should expect heightened volatility in the financial markets over the near term as the financial markets continue to adjust to this new reality.

“While near term volatility in the markets will no doubt worry investors, we believe this structural shift is a reason for optimism and will benefit investors and financial markets in the longer term.”

The report indicated Vanguard’s expectation of central banks reducing interest rates in the second half of 2024, as inflation shows signs of returning to target.

“The end of the zero-rate era has arrived and barring a major economic shock, we are unlikely to see the return to zero rates for many years to come. However, while higher interest rates are painful for most borrowers, they are advantageous for most investors, particularly those who are well-diversified and investing for the long term,” Gray said.

“It is Vanguard’s view that this shift to higher interest rates is the single best economic financial development in 20 years, delivering benefits in the long run.”

The report also highlighted Vanguard’s belief that Australia’s less constraining monetary policy may help it “narrowly avoid a recession”, in addition to higher commodity prices as a key exporter.

Australian bond returns are also returning to time with better valuations, currently expected in the region of 4.3 per cent to 5.3 per cent, compared to 1.3 per cent to 2.3 per cent when interest rates were closer to zero.

Vanguard also emphasised the effect of diversified portfolios, driven by higher interest rates pushing bond return expectations up.

“The headlines and industry commentary were plastered with obituaries for the 60/40 in 2022 but the case for the 60/40 portfolio, spurred by higher bond return expectations, is now stronger than it has been in recent times,” Gray said.

“While volatility in the financial markets are not quite in the rearview mirror, we are nearing the end of this structural shift. As we move towards higher interest rates and as markets settle, the permanence of higher interest rates will lay a solid foundation for long-term investors.”