Wealth Managers Favor Quality Bonds and Stocks in 2024

Explore why UBS and RBC Wealth Management are urging caution in equities and advocating for a focus on higher-quality segments in 2024.

As we approach 2024, wealth managers are showing a reluctance to take on significant risks, instead favoring quality bonds and stocks. UBS Global Wealth Management reported on Friday that the equity markets have had a shaky start in early 2024.

"At the close of US equity trading on Thursday, 10-year US Treasury yields had increased by 20 basis points since December, reaching 4 per cent, while the S&P 500 had declined by 2 per cent over the same period," UBS stated in a note. Investors have also reduced the likelihood of an early rate cut by the Federal Reserve to a market-implied probability of 66 per cent that the Fed will ease policy at its March policy meeting, down from 86 per cent at the end of last week. This has contributed to a third consecutive daily decline in the S&P 500, marking the first time since 2015 that the index has started the year with consecutive falls. This is part of a broader risk-off movement. High yield credit spreads have also widened, typically a sign of increasing risk aversion, according to UBS.

However, UBS believes that the recent movements are largely a reflection of the extent to which markets rallied in the final two months of 2023. The latest Fed minutes, while indicating some caution over the pace of cuts, continued to support the view that easing is on the way this year. The overall tone of the minutes released on Wednesday was less dovish than Fed Chair Jerome Powell's remarks at the press conference following the December meeting, during which he noted that policymakers had begun discussing lowering rates.

Among the more hawkish elements in the minutes, it was revealed that many policymakers felt that the rapid decline in government bond yields, leading to an easing of financial conditions, could make it more difficult for the Federal Open Market Committee to achieve its inflation goal. However, such comments were balanced by the observation by a number of participants that "downside risks to the economy" would arise if rates were kept restrictive for too long, UBS said. The prospect for rate cuts should also support stocks, albeit against a backdrop of more moderate growth. UBS continues to favor quality stocks – those issued by companies with strong balance sheets, high returns on invested capital, and a track record of delivering earnings.

As indicated last November, UBS expects Fed easing to support quality bonds and equities alike in 2024. RBC Wealth Management also echoed UBS' views on Friday, cautioning on equities in 2024. RBC WM maintains market weight positioning in equities overall, which aims to balance the risks of a US recession against the possibility that one may again be averted. The firm recommends tilting portfolios towards higher-quality segments of the equity market, including those companies with resilient balance sheets, sustainable dividends, and reliable cash flow generation.

As we enter 2024, wealth managers are displaying a preference for quality bonds and stocks, while exercising caution in the face of a shaky start in the equity markets. The prospect of rate cuts is expected to support stocks, albeit against a backdrop of more moderate growth. Both UBS Global Wealth Management and RBC Wealth Management are advocating for a cautious approach to equities in 2024, recommending a focus on higher-quality segments of the equity market.