Possibly a bit higher, depending on where you invest in equities and bonds. But the important thing is less downside risk.
We’ve talked about stocks, we’ve talked about bonds. What’s your take on commodities for next year?
Commodities have a very useful role in multi-asset portfolios. We found in our research that in periods of high and rising inflation, commodities will be very useful diversifiers for 60/40 portfolios, and we’ve been recommending an overweight in commodities in our asset allocation in 2022. But now we are in an environment of falling inflation, and inflation is already starting to be, as I mentioned, much closer to the central bank targets.
So the necessity to have commodities as an overweight has come down — we have been neutral since the summer. You have to consider that commodities are a volatile asset class. They are often more volatile than equities, and that means the hurdle rate to allocate to commodities is a bit higher for most asset allocators.
That said, as our commodities team would note, you have to consider geopolitical risk. If you are seeing an escalation of geopolitical risk in the Middle East, there has historically been a link between oil prices and concerns about oil supply and Middle East tensions. So that makes commodities useful as a diversifier.
And then there are long run drivers, which are less about next year alone, such as the long run demand forelectrification metalslike copper. That’s an area where our commodities team is quite bullish for next year because of supply deficits emerging. So, putting it all together, it’s a solid neutral.
Anything else from your outlook for 2024 that readers should be mindful of here?
We’ve done a lot work on alternatives. The big upside of a soft landing is that we didn’t get a recession. That also is a downside, because the recession usually creates a valuation reset and an economic reset — that creates opportunities for better subsequent returns for traditional assets.
Across assets, opportunities are a bit more limited, which means there’s more focus on alternatives, on alpha (i.e. returns that are less correlated with traditional assets) rather than beta. Private markets,private equity, private credit, and venture capital are, in my opinion, highly active forms of asset management — concentrated portfolios with direct engagement with your investments. It becomes an environment for more active investing, for private markets, but also for other alternative investments like hedge funds.
Also I would mention that after the material November rally we have been looking more at hedging strategies for equities and credit as implied volatility has reset materially. While we think the outlook for 60/40 portfolios is likely to be better in 2024, and risks will come down, the market has pulled a large part of the upside forward, and there can be setbacks in the near-term, especially if the macro backdrop disappoints relative to an optimistic baseline.
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