Morningstar points to opportunities amid 2024’s uncertainties

Many investors may have found 2023 challenging and the same appears likely for 2024 but major research and ratings house, Morningstar, says it is actually cautiously optimistic for both stocks and bonds in the new year, even accounting for heightened risk.

In an outlook for 2024, Morningstar said it saw opportunities in size, style sector and country exposures with targeted exposure well-placed to beat broad market-weight exposure.

It said that for bonds, its experts see broad appeal across different maturity profiles, with Government bonds being the preferred exposure in circumstances where corporate bonds are priced for a slowdown, but not a recession, with tight credit spreads.

Looking at equities, the Morningstar analysis said equities look fairly well positioned at the start 2024, “despite facing a wall of worry”.

“Equities are generally considered reasonably valued overall, with all major countries better placed than a few years ago from a valuation standpoint,” it said.

“Overall, we see core equities as playing a role for investors. In Australia, we see reasonable valuations, although believe it is important to invest differently to the index. In the U.S., the concentrated rise in the so-called “magnificent seven” has also created opportunities to add selected value—which looks especially interesting in smaller, value-oriented companies.”

“Turning to emerging markets, while undoubtedly risky, we can see strong return prospects in most scenarios, although position sizing remains important.”

On the fixed income front, the analysis said broad opportunities exist, especially in developed markets but emphasised that Morningstar was attracted to Government bonds over corporate bonds and that while Australian bonds looked decent the preference was for US Treasuries.

Looking at the broader economic backdrop and portfolio positioning, the Morningstar analysis defined the key takeaways as being:

• We expect further economic change in 2024. The global economy remains fragile. Against this backdrop, it is plausible for many central banks to cut rates from mid-2024 and into 2025.
• Questions around potential recession risks and the inflation outlook will likely persist. Developed world central banks, including the RBA, are walking a tight-rope between reducing inflation and strangling a struggling economy. There are a wide range of potential outcomes around the base case.
• Among equities, valuations present us with opportunities. By looking for undervalued areas of the market that can add robustness, defensive stocks are of interest.
• Certain scenarios pose a challenge to any “base case” assessment. At present, known risks include geopolitics and its impact on the oil price, for example. However, our scenario analysis sheds light on various potential outcomes that are currently unknown too, offering a perspective on non-normal scenarios that can greatly influence investment decision-making. Defensive equities and a mix of bond holdings feature as core assets to manage these risks.