2024 may be a challenging year for investors. Although inflation growth has started to slow down, it is still high enough to impede global economies, businesses, and investing capabilities. Therefore, investors should look for market trends that can help them generate positive returns.

Morgan Stanley Research strategists predict that economic growth will stall particularly in the U.S., Europe and the UK. Meanwhile, China risks getting “sucked into a wider debt-deflation spiral”, sending ripple effects across the rest of Asia as well as other regions.

Considering the economic environment that provides limited opportunities for increased corporate valuations, investors should know which stocks and assets are bound for a stronger performance in 2024 and when to buy them.?

Mind Mid-Year Fiscal Policy Changes

Morgan Stanley analysts estimate that global equities may see a decrease in value early in the year. However, if central banks stick to their plan to begin cutting rates in June, falling inflation should lead to market growth. Global stock markets might display uneven reactions to policy changes, with U.S. equities predicted to reach better outcomes than European or emerging-market stocks.?

At the same time, investors should not focus solely on U.S. companies. Emerging markets could see stronger recovery in the H2 2024, boosted by lower rates and a weakening U.S. dollar.?

High-quality Fixed Income Pays Off Better Than Ever

Fixed income investments are assets and securities that bring fixed cash flow for investors. These include highly-rated bonds, mutual funds, and exchange-traded funds (ETFs). Government bonds today generate attractive and reliable returns, standing in sharp contrast to decades of low interest rates that have continuously suppressed fixed income profitability.?

Yields on a cross-section of U.S. corporate and government bonds reached 6% this year, the highest since 2009. Meanwhile, U.S. Treasury and German Bund yields display the highest return in a few decades.?

Besides the rise in nominal interest rates, high-quality fixed income investments have also experienced significant increases in rates adjusted for inflation (so-called ‘real’ interest rates). Therefore, bonds’ popularity have risen in recent months alongside interest rates.?

As Morgan Stanley forecasts 10-year yields on U.S. Treasurys would stand at 3.95%, and DBR at 1.8% by the end of 2024, fixed income, including government debt, agency mortgage-backed debt and investment-grade debt, should remain an important part of investors’ portfolios next year. Focusing on short-term bonds will provide additional protection from the risk of unexpected changes in federal policies.??

Active ETFs Are on the Rise

The demand for actively-managed exchange-traded funds (ETFs) has been gradually rising over the past year. Active ETFs differ from the typical passively-managed ones as portfolio managers may adjust investments within the fund as needed instead of simply tracking an index.?

This type of funds offers investors targeted exposure to selected stocks and markets along with enhanced tax efficiency. They can be customised to meet specific financial goals and adjusted to leverage short-term opportunities. Today, investors value the potential of active ETFs’ flexibility even more, since they can help cushion volatility risks amid economic uncertainty.?

According to Morgan and Stanley’s statistics, active ETFs represented $444 billion in assets in October 2023, the amount has nearly tripled since October 2020.?

“There are strong inflows into actively managed ETFs, and we’re seeing investor demand for strategy-specific and tax-efficient ETFs that are run with institutional capabilities in an uncertain market,” says Anthony Rochte, Morgan Stanley’s Global Head of ETFs.

Investing in U.S. Renewable Market Remains Attractive

The U.S. Inflation Reduction Act (IRA) adopted in 2022 offers tax credits to both domestic and foreign corporations that invest in U.S. clean energy and manufacturing. Global companies can reduce costs by constructing and operating clean energy projects, such as solar, wind, standalone storage and carbon sequestration, or financing similar projects.?

Moreover, corporations can purchase tax credits at a discount via transfer under the IRA’s “transferability rules.” To maximise financial benefits, companies can invest in private and publicly traded energy producers with robust energy transition strategies.?

Most renewable energy experts believe that regardless of the 2024 election outcome, the IRA will likely remain in place and keep attracting all types of investors.?

Mid- and Small-Cap Stocks Present Untapped Opportunities

Although stock market leaders like Big Tech companies have traditionally remained unchanged during the last few years, investors might want to pay attention to mid- and small-cap stocks this year. Currently, they are trading at a discount to historical rates.?

By searching for opportunities among smaller cap stocks, one can unlock significant growth opportunities and potentially accelerate their earnings. High-quality small-cap and mid-cap stocks are a good choice for those ready to bet for the future and invest long-term. Due to the growing investor base, increasing market share, vast revenue potential, and capacity expansion, small companies may multiply one’s initial investment at low cost.

Direct Indexing Offers More Personalisation

Direct indexing involves buying individual stocks that make up an index, such as the S&P 500 or the Russell 3000, in a taxable account in the same weights as the index. You can also select individual stocks based on your preferences and investment goals, choosing to include or exclude specific companies, sectors, or industries. In theory, you own the stock and manage it yourself. However, most people prefer working with an advisor in a separately managed account.

This investing strategy can be automated since a money manager might use computer algorithms to form the individual portfolio that replicates a select index. The approach has several advantages, such as lowering investors’ capital-gains tax bill, customisation, reducing exposure to specific risks, maintaining the profitability of successful indexes, focusing on ESG or other values-based investing preferences, and donating individual stocks through charitable giving with maximum tax benefits.?

Summary

In a challenging economic environment of 2024, investors should look for market trends that can help them generate positive returns. In particular, the demand for active ETFs, high-quality fixed income securities, and the U.S. renewable energy market has grown lately. These trends will remain relevant in 2024 as well. In addition, investors should pay attention to small-cap and mid-cap stocks if they are ready to bet for the future and invest long-term. Moreover, experts advise to track federal rate cuts, as falling inflation should lead to market growth around mid-year.?