With 2023 all but done and dusted, financial professionals are looking ahead and lining up expectations for 2024, with some of them calling for a stellar year.

Among them last week was Allspring, the $550 billion asset manager that two years ago broke off from Wells Fargo and set itself up as an independent firm that’s partially employee-owned.

“We like to call it our start-up at scale,” said Allspring’s CEO Joseph Sullivan as he introduced a handful of portfolio managers to give their 50,000-foot outlook on what the risks and opportunities might be in their respective areas. Allspring, headquartered in Charlotte, N.C., has 22 offices around the world.

“We think the market always offers opportunity, no matter the circumstances. Right now is a time of particular focus on fixed income,” he said. “This is a great opportunity for us, given that fixed income accounts for almost 80% of our asset base.”

Sullivan, in delivering an overview of the markets, said Allspring sees five key risks for 2024, not least of which is as the remaining concern of a global recession. The potential length and severity unknown. There is also geopolitical risk, with the possibility of conflict escalation exerting significant pressure on global markets, and the continued strain on commercial real estate, as remote work is reducing valuations just as debt may need to be refinanced at a higher rate. Inflation is still a bit sticky, he said, and interest rates will remain elevated for at least the first part of the year.

“On the other hand, we're very energized by what we see as a broad set of opportunities,” he concluded. “We strongly believe in the staying power in the fixed income markets. We do expect money market yields to remain elevated for a period of time. If there's a recession, we expect high quality, longer duration bonds to perform well. And as always, diversification will remain key in 2024. We believe that investors should invest across the liquidity spectrum, capitalizing on uncorrelated returns from liquid alternatives, while keeping some dry power to be opportunistic as markets change.”

Equity Investing
Ann Miletti, head of active equity, started her analysis saying it’s important to remain humble when making forecasts about the future in a world of uncertainty. “What is easier for me to discuss is fundamentals, both what happened and what we've seen in 2023, and things that we think can influence 2024 results,” she said.

One of the things that investors saw this year was a very narrow stock market where just seven stocks in the S&P 500 returned 55% though the end of September, she said, and the remaining 493 companies returned less than 3%.

“Unprecedented in the returns,” she said. “That’s $3.7 trillion in market cap added through the end of Q3, which is nearly half the market cap of the entire mid-cap universe, delivered by just those seven names. Pretty crazy.”

That occurred, she said, for some fundamental reasons. For example, five of those seven names grew earnings more than 30% through the third quarter, while the rest of those 493 names collectively had zero earnings growth., she said.

Two areas where Miletti sees opportunities for 2024 are sectors that have seen multiple compression, such as health care, staples, REITS and utlililties, which combined have seen multiple compression of more than 11%, and mid-cap stocks in general.

“If you think about those Mag Seven, obviously they had really good growth, but they're large companies. If I think about the math and how difficult it is to repeat that growth in 2024, I think it's going to be challenging,” she said. “The other area that the market really has tuned out is the mid-cap space. The Russell 2500 typically trades at a premium to the large-cap space, but it hasn't. Again, I go back to fundamentals and ask myself why.”

For a bottom-up stock picker, there are companies in the small- and mid-cap space that produce free cash flow and have margins, she said. “In fact, if you take out small-cap companies that have free cash flow and have margins of 20% or greater and look at those companies relative to their large-cap peer group, they're trading at a 25% discount,” Miletti said. “I would say if you produce free cash and you have 20% margins or higher, by definition to me that is a pretty high-quality company.”

And while she said she did not want to give a top-down macro judgment on where the economy is going to say, “from a bottom-up perspective, I actually do think we can get positive returns whether we have a soft landing or a recession, whether it’s mid-single digit or high-single digit returns.”

Fixed Income
George Bory, chief investment strategist for Allspring’s fixed income group, said that the last two years of first losses and then intense volatility in bonds was “making up for” 15 years of volatility suppression as central banks around the world countered the Global Financial Crisis.

“We're in the midst of a massive renormalization of bond markets. So, from that perspective, as we go into 2024, it's a radically different world today than it was just two years ago,” he said.

When Bory thinks about how to position bonds, he said three factors come to mind. First, the bond market is very well supported by tight monetary policy, slowing growth and declining inflation.

“Those are the three most important factors that any bond investor wants to see,” he said. “It’s a little bit more challenging for the equity folks, but for bond investors, these are good times.”

Second, real yields remain strongly positive. “As bond investors, it’s your job to beat inflation over time. And you can do that today without taking a huge amount of risk,” he said. “It doesn't matter if you're a muni investor, a U.S. corporate bond investor, or a global bond investor. You can do that today much more easily than you could just a couple of years ago.”

And third, while liquidity in bonds can be challenging at times, that in itself creates a risk premium that’s exploitable through time, he said. “Technicals matter in our market. When we look across the bond market, we see good fundamentals, we see attractive valuations, and we see a technical backdrop. That's going to be challenging, but not impossible if you're a diligent investor with tight risk controls and can navigate your way through.”

From Bory’s perspective, 2024 could offer some excitement. Even though rate cuts are expected, most likely in the second half of the year, monetary policy should remain tight, he said. And volatility will remain in the picture, though Bory said he expects it will decrease.

“We have three simple strategies for 2024 when we think about a road map,” he said.

First, diversify duration, he said. While it’s comfortable to earn yields of 5.5% for cash right now, duration will provide yield over longer periods of time, plus provide the upside of capital appreciation.

“That's where we get total returns from. When you think about a 6% portfolio for an average market duration, if yields drop by just 50 basis points, you're looking at a 9.5% return. That's pretty juicy,” he said. “If yields go up 50 basis points, you're looking at a positive 2.5% return.”

Second, prioritize flexibility. With two ongoing wars, massive social upheaval and elections next year in the U.S. and elsewhere, investors need to make sure a portfolio is set up to manage that volatility, he said.

“Bonds give steady streams of income. When you set that up, you can navigate and weather a lot of volatility in the market,” he said. “That means being very specific with your portfolio.”

Third, be intentional with risk, he said. “When volatility is high and dispersion is wide, you want to be very specific in the bonds that you hold in your portfolio,” he said. “You do not want unintended risks, and that's what you inherit when you buy the broad market. When you curate the portfolio, it becomes very specific.”

In the emerging markets arena, Alison Shimada, senior portfolio manager, said the lacking performance of the asset class over the last 13 years is poised for a rebound, mostly because emerging markets are key enablers of AI technology.

“Artificial intelligence is a very big driver in emerging markets. It's the driver of particularly North Asia, South Korea, and Taiwan,” she said. “Components, producers, semiconductor producers, a lot of other things, those are found in emerging markets. You just don't hear about it very often.”

And Bryant VanCronkhite, senior portfolio manager for the global equity team, wrapped up the meeting by saying equity managers have benefited from a Federal Reserve that for 40 years continuously lowered interest rates.

“We have two generations of investors that know only this,” he said, adding that as companies have to refinance their debt, the higher interest rates are paid out of their growth potential. “As companies roll their debt, it consumes capital, leaving less capital left for productive growth.”

As such, VanCronkhite said he looks for companies that have cash-generating power throughout the business cycle and strong balance sheets to play offense with.