It is that time of year again. The time of year that everyone seems to hate, it’s dark, the Christmas decorations have come down – imagine being the unfortunate soul that has his birthday on 2 January.
One other thing I hate about January is it’s that time of year when many asset managers like to get out their proverbial crystal balls and try and make some predictions on what could happen over the coming 12 months. Indeed, I am putting pen to paper to write my own 2024 outlook.
Every year we get these predictions about what will happen in markets and the economy. And the problem is, while they can be great fun to read, one has to question whether they encourage the right behaviours. As the evidence demonstrates, making any type of point estimate of the future is likely to be incorrect. Demonstrating any strong conviction in an arbitrary short-term (12 month) future period feels artificial at best, and could lead to the erosion of value at worst if investor behaviour chases this prediction as truth.
For example, let’s journey back to 2023 when at the start of the year some 85% of economists said there would be a recession. Flash forward 12 months and guess what … we are still waiting. And no one is immune to this foible – one just has to remember Greenspan’s now infamous 2007 prediction of the Fed reaching double-digit rates. One year on, the Fed held rates at historical lows. This is nothing against economists by the way – I’m proud of my Economics degree from the University of Warwick.
Don’t get me wrong I do understand why outlooks exist; they are actually quite enjoyable and they can present a good opportunity to talk about the merits of an asset class, or a style of investing. The problem is that even the best are rarely spot on. And as for those that predict levels of different indices at year-end…don’t get me started. The flip-side, however, is those that don’t show conviction, actually don’t say much at all.
So what’s the alternative? I think it is to have a range around a point estimate. What could this look like? The idea is that you define a plausible scenario, ‘X’, but also declare that probability of ‘X’ happening is ‘Y’ and the probability of it not happening is ‘Z’.
As an industry we hold inordinate conviction in our base case, when history teaches us it should be anything but. What I want the reader to understand is this: while an outlook may be brilliant and robust, the reality is that lots of things can happen over the year and the probability of anybody’s base case being a certainty, or coming to fruition, is really very low.
So this year when writing our own, I’m going to throw away the crystal ball and instead focus on the key principles of investing. For me the key ones are; be client-focused, remain diversified, understand where your active risks are being taken, and remain disciplined. These are the key principles for building any portfolio, the so-called Foundational Four.
Of course there needs to be a discussion of the key risks out there. Some are more elevated than in previous years, like the concentration conundrum in the US, cracks in the credit market and geo-political risks worldwide, which are definitely more elevated than last year. Of course, election risk is prevalent with 50% of the world going to the polls in 2024.
We need to think about these and how we navigate them. Because we know that risk is more elevated in certain areas, but also some risks are less elevated in certain areas, and our best chance of gaining conviction in our outlooks it to accept these risks are subject to shift through time in ways we cannot possibly foresee except on a probabilistic basis.
Clearly the key to investing is about balancing these risks but also articulating them to investors so they are aware of them. While a lot of time goes into writing outlooks, ultimately you have to take them with a bit of a pinch of salt.
So now that my rant is over, I had better crack on with finishing my 2024 outlook…
Justin Onuekwusi is chief investment officer at St James’s Place
