New positions have been taken in the Premier Miton US Opportunities fund and two exchange-traded funds (ETFs), the iShares Up to Years Index-Linked Gilt Index and iShares Up To 10 Years Gilts Index.

“There is a huge amount of market noise at the moment around the AI boom, and the surging ‘Magnificent Seven’ stocks that are driving US, and even global indices higher,” said James Burns, lead manager of the Evelyn Partners Core MPS.

“With positions already benefiting from this trend, we believe there is value in seeking exposure to other areas of the US stockmarket where gains could broaden out from big tech,” he added.

See also: Pacific, Albemarle and Hymans Robertson model portfolios added to Parmenion platform

The increase in exposure to the US was done at the expense of UK equities, and to a lesser degree, Europe, which were both trimmed back.

In terms of fixed income, Burns said that since October 2022 the MPS had steadily been increasing its weighting to government bonds across the risk spectrums and this move continued in the latest rebalancing.

“We see short-to-medium dated gilts as the area of the bond market that offers the best value at the moment, so within fixed income we’re seeking more exposure there,” he said.

To fund this move, the Core MPS trimmed back its allocation to US government conventional and index-linked bonds, although Burns added they remain “dominant” positions within that segment of the portfolios.

Corporate bond positions were also reduced, as Burns said credit spreads have continued to tighten to levels which meant their protection characteristics have “become less obvious”.

“Where we retain exposure, it is significantly skewed to short-dated bonds that should fare relatively well in the event of any downturn,” he said.

In the firm’s strategic asset allocation report for 2024, it argued the “painful” interest rate rising cycle that has been seen in developed markets in the last 12 months has come to an end, providing a more positive outlook for investors, particularly towards the lower end of the risk spectrum.

As a result, within its lower risk portfolios the allocation to global high yield (hedged) has been reduced in favour of UK corporate bonds, while the allocation to cash was moderated and reallocated to UK government bonds and some UK corporate bonds.

“The opportunity to add exposure to fixed interest where yields now look appealing feels like an appropriate move for 2024,” said Ryan Hughes, investments director at AJ Bell Investments.

See also: AJ Bell advised customers reach 161,000 as assets jump to £76.2bn

“At this point, with interest rates deemed near their peak, the reinvestment risk of cash can be high and denying the portfolios the opportunity to participate in any possible re-steepening of the yield curve would be to deny them the traditional downside protection from government bonds in a wider ‘risk off’ environment,” he added.

When compared to the returns available from cash and assets with lower volatility, Hughes admitted the overall case for global equities does look less attractive at the start of the year.

“Within equities the situation is more nuanced,” he said. “However, valuation dispersions remain wide and therefore adjustment away from the US and towards lower P/E markets, such as Europe and Japan, feels more appropriate.”

As a result, across AJ Bell’s portfolios the exposure to US equities has been cut by four percentage points (pps), while the weighting to Europe has been increased in the region of 2-4pps depending on the risk profile of the MPS.

“We accept that we do not know what 2024 will bring [neither does anyone else for that matter] and we have avoided making dramatic changes to the equity/bond split of portfolios, a major determinant of how they will perform in different market environments,” Hughes said.

“In all portfolios, there remains significant diversification to ensure that no one type of risk dominates,” he added.

The 39 reaching the status make up 2.8% of funds, a decrease from the 3.9% of funds reaching a top-quartile performance in Q3 of 2023. Historically, the percentage of funds with top-quartile status has sat between 2-4%. While the number of specific funds with top-quartile performances decreased in the final quarter of the year, only two of the Investment Association’s 56 sectors failed to achieve positive total returns, on average.

Kelly Prior, investment manager in the multi-manager team at Columbia Threadneedle Investments, said: “Consistency faltered in the fourth quarter as the mood music again took on a different tempo. Having failed to respond to expectations of a change in rate outlook for much of the year, the final Federal Reserve meeting of 2023 offered a more dovish tone.

The Japan sector had the largest number of funds which reached top quartile, with 12.3% of the funds sitting within that group. Japan also had 32.3% of funds that performed above the median over three years.

“Japan proved to be something of an outlier in 2023,” Prior said. “A market often forgotten due to its ever-decreasing importance in global indices, it continues to prove a rich hunting ground for active management.”

See also: Square Mile: Nine funds poised for success in 2024

The two sectors which recorded negative performance in the fourth quarter of 2023 were China/Greater China, which fell 8.4%, and UK Direct Property, which lost 0.2%. The greatest returns came from the Latin America sector, up by 12%, and the Technology & Telecom sector, returning an average of 11.8%. Property Other also saw strong gains, with an increase of 10.3%.

“As we peer into our tea leaves for inspiration for the year to come it strikes us that we may be nearing a time to be brave. China, the standout underperformer this quarter, looks ripe for a change of sentiment while India is priced for perfection, and if private equity needs to start deploying capital, then smaller companies are viewed as a steal, particularly in the UK,” Prior said.

“High yield has been fabulous but when floating rates start to bite there will be winners and losers, and emerging market central bankers have been ahead of the curve in hiking and then cutting interest rates while their developed market cousins sat on the side lines. Indeed, a change in the fortunes of the ‘Magnificent Seven’ stocks could result in a change in consistency outcomes for US equity funds too.”

This article was written for our sister title Portfolio Adviser

In a commentary note, the fund rating firm’s client engagement manager Katie Sykes and MPS accounts manager Scott McNiven noted the conflicting signals in the global markets.

“2023 hasn’t quite been the disaster area expected when it comes to recession, but savings built up by households and businesses during the pandemic must be nearing depletion point by now,” they said.

“Government influence through spending and taxation is coming to an end and with the cost of living having skyrocketed over the last two years, refinancing needs are back with a vengeance in an environment of credit tightening.”

See also: What does 2024 hold in store for the wealth management industry?

The pair acknowledged the prevailing view is that interest rates have peaked as inflation is being brought under control, but the timing on rate cuts remains very uncertain.

The question of whether central banks will wait until damage from higher rates becomes ‘obvious’ or move early enough to avoid a recession is a crucial one.

“Europe is slowing down faster than the US and we’re already seeing signs of a recession,” they noted. “Will this direction of travel take hold, and will we see the same trend in the US in the coming months?”

“Wall Street seems convinced that a soft landing will be achieved, and a deep recession avoided, but economic growth will be slow as a result. No matter where you’re placing your bets, it’s all to play for in 2024 and the mood may shift at pace.”

Turning to equities, RSMR urged caution over the ‘Magnificent Seven’ US giants that dominated the stockmarket last year: Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla.

See also: Mattioli Woods eyes ‘robust acquisition pipeline’ as assets inch down to £15.2bn

“Coming into 2024, between them, they were worth more than the stock markets of the UK, Japan, France, China, and Canada combined,” they said.

“They now make up roughly 20% of the global stockmarket and last year their shares rose by around 70% on average, heavily contributing to stock market gains as a whole. If you had them in your portfolio last year, you were likely to be sitting pretty, but the outlook for 2024 may not be quite so marvellous.”

RSMR added that data from Refinitiv shows market shares of the Magnificent Seven fell by $316bn over the first two trading days of 2024.

“Given that they have many similar characteristics, one thing seems likely – if one falls, the domino effect will render them all much less magnificent,” they noted.

The firm pointed to emerging markets  as potential bright spot with companies expected to have higher earnings growth than the developed world in 2024.

“Divergencies exists of course and not all countries will profit to the same degree, but emerging markets equities should benefit from an improving growth premium and increasing exports, forging a brighter earnings outlook.”

China remains a concern, but there are some positive signs. “Investors have been concerned over slowing growth and high levels of debt and with investment in real estate in China floundering in recent years, there’s definite room for improvement,” the RSMR team said.

The firm also noted industries in China such as aviation, healthcare, renewable energy, and high-end manufacturing are showing ‘high growth potential’ and are open to foreign investment.

See also: Schroders launches multi-asset income fund

The AI theme is very much in play in China, with the direction of global AI governance and China’s role in the developing panorama being something to watch.

RSMR also said India has ‘gone from strength to strength’ in 2023 achieving 7-8% economic growth and prospects remain bright, supported by mainly domestic demand. By 2028, India’s economy is expected to be bigger than Germany and Japan, making it the third largest globally.