Where To Invest 2024

In this video, I look at where to invest in 2024: which countries, which sectors, gold, bonds or other asset classes and provide an overview of valuation across stock markets. Additionally, as it’s forecasting season again we can poke some fun at last year’s broker forecasts to look at how well they have performed as well as examine their predictions for 2024.

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Timestamps
00:00 Introduction
00:35 US Equity Valuation
04:45 US Earnings
08:29 Country Valuation
11:15 US Sectors
13:13 Gold
14:38 Corporate Bonds
16:16 Monetary Policy
19:07 Asset Classes in the Decade Ahead
21:40 Base Rates
22:40 Analysts Forecasts
25:52 Conclusion

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DISCLAIMER
All information is given for educational purposes and is not financial advice. Ramin does not provide recommendations and is not responsible for investment actions taken by viewers. Figures that are quoted refer to the past and past performance is not a reliable indicator of future results.

In this video I look at where to invest in 2024 which countries which sectors gold bonds or other asset classes I’ll also provide an overview of valuations across stock markets and of course it’s forecasting season so we’ll poke some fun at some broker forecasts to look at

How well they’ve performed in the past and we’ll also look at what they’re forecasting for 2024 now don’t forget if you do enjoy our content please do like this video And subscribe to our Channel so now let’s look at where to invest in 2024 in a bit more detail let’s begin by

Looking at us Equity valuation one interesting measure to look at at the moment because it adjusts the real interest rates is the excess Cape yield from Robert Schiller this takes the cape measure the cyclically adjusted price to earnings multiple which is the price of the index divided by the earnings over

The previous decade then it inverts that measure and and it subtracts the real rate of interest this captures the intuition that if interest rates are low then people should be willing to pay more for stocks now for a long time the cape measure showed that stocks were overvalued because it wasn’t adjusting

For very low interest rates however people were saying it should adjust for that so this is why Robert Schiller came up with this measure however now that interest rates real interest rates are surged upwards it actually makes stocks look expensive again and that’s because stocks haven’t re ated downwards to

Adjust for that higher real rate of interest so what I’ve done here is on the xaxis going back to the 1800s late 1800s I’ve shown the starting point for this excess Cape yield measure and then on the Y AIS what you can see are the returns from the US Stock Market the S&P

500 over the following decade and that’s the total real return on stocks inflation adjusted and reinvesting dividends so as you’d expect when stocks were expensive on the left hand side of the graph that’s when you tend to get the lowest return over the following decade and when stocks are cheap that’s

On the right hand side of the graph you can see that then returns tend to be higher but there’s a lot of noise in the graph it isn’t a perfect predictor far from it and usually it’s most informative at the extremes of the distribution and currently you can see

That the US is looking expensive by this measure so if we slice through the distribution that’s the dashed yellow line you can see given the current value of the EXs Cape yield you can see that that tends to give lower returns although it’s not such an extreme valuation that you’d get very low

Returns so really all we can say is that currently us markets are quite expensive and that tends to be a slight drag on the following decade of returns if we look at that exscape yield measure over time you can see when it’s expensive that’s when it’s low and when it’s cheap

That’s when it’s high so red is expensive blue is cheap and currently it’s getting into expensive territory and gradually creeping deeper into expensive territory as I say this is because stocks have not rated downwards to reflect new higher real interest rates or at least they haven’t rated downwards sufficiently another common

Measure valuation for stocks is to look at forward price to earnings multiples this is based on forecasts of what stocks are going to generate in the S&P 500 and then it’s a kind of bottomup estimate which looks at the 500 stocks in the S&P 500 and Aggregates up to the

Index level so make no mistake this is based on a guess of what profit stocks are going to generate in the s&p500 but what’s good about this measure is that it’s forward-looking it’s based on what Brokers expect these companies are going to generate and presumably they’ll factor in everything they know about

Economics also what they know about about those single stocks now normally this makes stocks look cheap because Brokers tend to be quite bullish on their broker forecast for profits and we’re dividing by a big number so usually that makes stocks look cheaper however at the moment that measure to is

Looking a little bit toppy it’s above the 5year average which is the dash green line and it’s above the 10year average which is the dash blue line now of course this is a mean reverting measure you don’t expect this to trundle up with forever you’d expect it to come

Back to a long-term average so by this measure as well US stocks looking quite expensive to be fair nothing like they were in 2020 following the pandemic rally however still a bit expensive so now let’s dig into those us profit forecasts or us earnings as they’re called so this is that bottom up

Estimate based on forecast for the individual stocks in the S&P 500 and what this graph shows you is how that forecast has evolved over time the yellow line is the current forecast and the blue line is what actually happened in the past now on average US earnings

Tends to grow by around 6% real over the long term and you can see that there was a big dip during the pandemic there was a huge surge back upwards in terms of profits following the pandemic then we reached a kind of Hiatus point where growth in profits seemed to stabilize

Now we seem to be going back to that Trend growth as we move into 2024 so if instead of looking at the level of profits we look at the year-on-year change in profits the red bars here are the forecasts the blue bars are what happened in the past you can see that

We’ve had three successive quarters where there was negative earnings growth in other words profits were falling year on year however the forecast is that that growth in profits will come back in Q3 of 2023 it’ll weaken slightly in Q4 but then in 2024 we’re seeing some really quite Punchy year-on-year growth

In profits what that means is that if there is a rally in stocks over the next 12 months say then it will be backed up by a fundamental growth in profitability for us companies so this is reassuring to see that we’ve gone from a period of weak and negative earnings growth to one

In which there should be hopefully positive and accelerating earnings growth now of course the big story of 2023 was the dominance of The Magnificent 7 these are seven stocks which utterly dominate the US market these tend to be tech stocks although the individual sectors aren’t all classified as Tech Tesla for example is

Consumer discretionary for example so is Amazon but the question is whether the fundamental profit growth of those companies justifies their huge dominance as part of the S&P 500 and the NASDAQ and the answer is yes but only partly so the Magnificent 7 make up about a fifth

Of the S&P 500 forward profits looking a year ahead if we look at the Top Line the revenue generated by those companies they only make up about 11% of S&P 500 forward Revenue why the difference between the two well these tend to be companies which have very high margins

So they turn Revenue into a loss of profit but what is worrying is that they make up about a third of the S&P 500 by market capitalization so the size of the companies as a proportion of the index is not in line with the proportion of profits which they generate for the

Index if we look at that graphically and go back to say 2013 it was the case in 2013 that profits were in line with market cap however over time what you can see has happened is that gradually these companies have baked in more and more Euphoria and generally investors

Are paying more for a fixed amount of profit than they were in the past now ultimately that will be unsustainable so this concentration in just a few stocks is probably unhealthy as many people have pointed out however how long it takes to correct itself remains to be seen and certainly these are companies

Which are very profitable very successful globally however I think this concentration is unhealthy and I think ultimately it’s not fully justified by the amount of profits that these companies generate now let’s consider country valuation for stock markets so what we’re looking at here is a cyclically adjusted price to earnings

Multiple this is the price of the index divided by the profits generated over the previous decade and this is the measure produced by Robert Chilla and here what we can do is compare across different countries now some countries are typically very cheap others are typically very expensive for example the

UK is typically cheaper than the US and that’s been true for a long time so instead of comparing multiples directly with one another what I’ve done here is to look at each country and ask a very simple question What proportion of the time has this country been cheaper so

For example India has been cheaper 87% of the time going back to when records began for that stock market the Netherlands also has been cheaper 87% of the time the US 82% of the time so those three countries you can see on the far left hand side of the graph are the ones

Which look very expensive relative to other countries in contrast Singapore China Hong Kong South Africa and Poland are looking particularly cheap right now amounts compared to their own history China for example has only been cheaper 2% of the time Poland only 10% of the time so if you are feeling particularly

Brave and you’re a contrarian investor then typically you’d look at these cheaper countries which are usually cheaper for a reason and think about whether that represents an opportunity and and often it does and probably you’d keep away from countries which are overvalued but you’d probably have to do

This for more than one measure this is just the cape measure and that way by using a broader set of measures you’d have a better idea of which countries are expensive and which are cheap so if we look at those Cape multiples over time this shows you the point I was

Making about some countries typically being expensive or cheap relative to one another what I’ve shown here is two of the most expensive countries that’s India and the US versus two of the cheapest which is UK and China so a lot of people for example have been saying well the UK looks very

Cheap but the UK typically looks very cheap so you always have to compare with its own history some countries just have lower valuations than others if we compare countries by another measure which is forward price to earnings multiples and this is based on data from yardeni what’s interesting is that we

See a very similar pattern with the US and India looking much more expensive than other countries Italy China the UK UK and Germany on the other hand look quite cheap just as they did with the cape measure so this kind of corroborates the analysis we did previously and shows a similar pattern

Of expensiveness and cheapness so contrarians this should help you now let’s look at us sectors and just looking back over the course of 2023 you can see which sectors have done exceptionally well compared to others and it’s primarily technology communication services and consumer discretionary which has done very well

So essentially this is the tech story in the US communication Services would include companies like alphabet and consumer discretionary as we saw would include companies like Tesla and also Amazon so following the tech wreck in 2022 when a lot of these tech companies sold off sharply 2023 is characterized

By a Resurgence in those stocks whereas almost every other sector is simply languishing in the dust behind those three super sectors now this usually means that those sectors will not continue outperforming in future usually it’s the beaten up sectors which will then come on to perform better so we can

Kind of ask the question which sectors are currently looking overvalued and which ones are looking very reasonably valued because that might help us see where the opportunities lie so what I’ve done here is I’ve taken the msci USA value index and I’ve looked at it sector composition versus its parent index

Which is msci USA just to see which sectors are overweighted because of the fact that they look attractively valued they have reasonable valuations so those sectors that we saw which are done incredibly well which is information technology and consumer discretionary those are underweighted in this value index because they’re now expensive

Whereas the unloved and beaten up sectors like financials Healthcare Industrials consumer staples PS all of those have got an overweight in msci value so this is just another way to see where the value lies in the US at the moment it’s certainly not true that all stocks and all sectors are expensive now

Let’s look at gold I find it useful to have an explanatory model for gold which explains what its price kind of should be given the state of various macroeconomic variables which Drive its price now if you’re one of our premium members on our website then you get

Access to these trackers one of which is an explanatory model for the price of gold so it’s this fair value tracker that we’re interested in now what goes into this model is the level of CPI inflation because Commodities tend to track inflation over time but also real interest rates because when interest

Rates are high gold is a wasting asset and that tends to drop its price and also the strength of the US dollar against a trade weighted basket of other currencies because when the dollar is strong then that pushes down the price price of gold it’s priced in dollars now

What’s interesting at the moment is that the price of gold isn’t too far off its fundamental price based on a simple regression model with those inputs it’s underpriced by around 5% we’ve got a similar model for silver which shows that silver also is slightly undervalued at the moment now if you are interested

In getting access to the trackers but also our community and lots of members only content and our chat applications so you can ask a question whenever you want you can do that very easily by going to our website pensioncraft tocom and that way you can learn more and

There’ll also be a link in the description if you want to go there directly now let’s think about corporate bonds now corporate bonds are now interesting because the risk-free rate which is what you’d get with a Government Bond is now much higher and then with corporate bonds you get an

Additional spread on top for taking the additional credit risk that’s the risk that these companies will not be able to repay you your Capital now that could be a really attractive Prospect if that credit spread was large I.E you got a big compensation for taking the credit

Risk however at the moment that’s not what we see what we actually see is in line with what we see in the stock market which is a bit of euphoria what that turns into in the credit Market a very tight credit spreads very little additional compensation for taking

Credit risk and that’s true across the credit Spectrum whether you look at AAA corporates these are companies with balance sheets all the way down to single B corporates which have slightly wobbly balance sheets and much higher risk of default for all of these different credit rating categories what

You’ll notice is that the spreads currently are below their long-term average denoted by this dashed yellow line so at the moment I don’t think the opportunities in this credit Market are particularly attractive but if we did have a ShakeOut in credit let’s say there was a commercial real estate Cris

Pris or a big pickup in defaults then there’d be a big selloff the credit spread would widen and I think that could be a much more attractive entry point so that’s certainly something that’s on my market crash shopping list so if that happens during 2024 you can

Be sure I’ll be talking about it now at the moment monetary policy is very important and a big driver of markets and primarily people are looking at what the Federal Reserve is doing in the US so we’ve just come off a period of very aggressive rate high

The FED is now in wait and see mode to see whether inflation is going to respond to its very tight monetary policy and the fact is that it does seem to be responding it is falling both as headline inflation and core inflation the FED is very reluctant to declare

Victory but it does look as if 2024 will be characterized by cuts and interest rates beginning so if we superimpose those fed meetings over the course of 2023 you can see that for the first three meetings we got 25 basis point hikes that’s a .25% increase in the

Fed’s policy rate then in June we got no hike we got a pause and then in July we got another hike but since then we haven’t had any more and in December durone pal said that it looks like we’re at the end of the cycle so probably no

New hikes coming we’re probably at the top of the cycle but if we do break down asset types to see how well they performed over the course of the year what really stands out is the NASDAQ index that QQQ NASDAQ tracker has simply surged ahead of all the other ETFs which

Are shown here it’s beaten gold it’s beaten real estate it’s beaten Emerging Market bonds junk bonds oil short-term us treasuries long-term us treasuries all of those have been trounced by the NASDAQ and to lesser extent the S&P 500 now the NASDAQ is even more concentrated than the S&P in those magnificent 7 name

So I’d be slightly concerned about the sustainability of that rally but if we do see monetary policy easing into 2024 then I’d expect a lot of the sectors which are now beaten up things like financials but also things which are very interest rate sensitive like real estate investment trusts and of

Course small caps I’d expect those to recover somewhat and perhaps make up some ground that they lost over the course of 2023 now if we look at what markets are pricing in for the FED policy over the course of 2024 I think they’re a little bit too optimistic about rate cuts the first

One’s expected in March and then we get one rate cut for every following meeting all the way up to September of 2024 then there’s a one month pause and then the cuts start again now that’s completely at odds with what the fed’s saying which is that it still hasn’t declared Victory

It’s still going to keep policy tight for a while it’s only just started to talk about rate Cuts so March I think May maybe too soon but eventually it’s going to happen the fed’s going to start cutting and I think these beaten up sectors will probably recover as a

Result it’s always worthwhile looking at a longer term forecast and we’ve got some here provided by Vanguard both in the UK and the US and these forecasts look out over a decade so starting out with Vanguard UK’s forecast I think what’s interesting here is that UK stocks aren’t expected to perform

Particularly well the 2020 3 midyear forecast has uprated UK’s stock slightly so somewhere between 4 and a half and 6.5% per year that’s the forecast return over the next decade but Global equities look considerably better there we’re talking about a range between 5.8 and 7.8% per year so I’m quite happy with my

Global Equity tracker which of course Has This Global exposure and that’s the only fund I own in my core portfolio what’s also interesting is if you look at bonds they’re now returning much more than they were just a year and a half ago say so UK aggregate bonds are now

Expected to return between 4.3 and 5.3% per year which is quite respectable Less in stocks of course but still not bad and Global Bond xuk somewhere between 4.3 and 5.3 now turning to the US model forecast what’s really interesting is if you look at us growth stocks they’re

Only expected to return between 1.2 and 3.2% over the next decade and that’s because of their very high valuations and this is the problem when you have Euphoria usually what it means is you overpay for a sector or a particular theme and vanguard’s model simply reflects that overvaluation whereas if

You look at us value stocks they’re going to return something between 4.8 and 6.8% according to vanguard’s model and again Global equities are probably the most attractive Prospect at between 7.1 and 99.1% per year and as I mentioned us us small caps are quite beaten up in terms of valuations so

Again there the return is expected to be between 4.9 and 6.9% per year Bonds in the US too are looking more attractive with returns for aggregate bonds so this would be a Tracker of the aggregate Bond index say that’s going to return between 4.8 and 5.8% per year so much better

Than we saw say a year ago and if we look at us junk bonds despite the fact credit spreads are very tight because risk free rates are now higher there expected to return around 6.4 to 7.4% per year which isn’t much less than the equity risk premium even us cash is

Expected to return between 4.1 and 5.1% and while we’re talking about long-term forecast let’s quickly remind ourselves of Base rates these are the average returns over extremely long periods of time that you’d expect from stocks bonds and T bills so T bills will generate roughly what you’d earn with

The money market fund say now over the long term if you look at the total return of stocks in the US they’ve generated about 6.4% above inflation for over 120 years now that’s an incredible inflation busting return and something which should never be forgotten compare that with bonds and on average they earn

About 4% less per year so certainly for money you’re going to set aside for a long period of time decades then it makes a lot of sense to put as much as you can into the stock market because bonds will will almost certainly underperform long term and money market

Funds will generate the least risk but also the lowest returns so they really are a temporary store of value for your cash I said we’d look at some analyst forecast for 2024 for a bit of fun and that’s exactly what we’re going to do now now I often talk about a cognitive

Bias called recency bias when I’m talking about Investors but you can see that Brokers working at investment banks are subject to ex exactly the same bias so this is the S&P 500 since 2017 that’s the blue line and using the yellow dash line I’ve just fitted the average rate

Of growth of that index now the horizontal yellow lines you can see here at the end of your forecast from the previous year made by individual investment Banks so the first set of forecast we’ll look at will be for the end of 2020 as made at the end of 2019

Now this was a scary period because it was during the pandemic people were worried about the systemic problems in the market the FED had to do massive intervention and what’s interesting is that they were far too bearish in fact the S&P ended up roughly in line with

The highest forecast of all of the forecasts for that year so too bearish in 2020 then we got this incredible Pandemania rally which extended into 2021 and again the forecasts were too bearish too gloomy they just didn’t price in all of that euphor Warrior that retail investors mostly generated in the

Stock market so in this case the end of year was way above even the highest broker forecast from the previous year maybe learning their lesson from 2020 and 2021 Brokers revised up their forecast very aggressively for 2022 just in time for the tech wreck when things

Reversed so for that year the S&P ended up well below even the most pessimistic forecast for the S&P 500 so you can see how they just extrapolate the trend that we’ve seen recently then in 2023 they were too bearish again and the S&P ended up above all of the forecasts at the end

Of last year so looking forward to 2024 what you can see is that the highest forecast for the S&P is 5400 the lowest is 4,200 and that corresponds to plus 14% as of the day I made this video for the S&P or- 11% % so a huge dispersion and

If we simply extrapolate the S&P 500 over this 7-year period and fit a line to it an exponential line that would put us at about 10% above where we’re closing as I make this video so that would be the upper end of the forecast from the individual Brokers now of

Course this 11% Trend growth that we see over this period since 2017 includes the period of zero interest rates if we go back further in time to 19 90 the growth rate diminishes to 7.9% and again extrapolating that would put us roughly at where we are now for

The S&P 500 in other words a year of no growth and that would be roughly in the middle of the pack for the broker forecasts for 2024 so next year we can have another laugh about this to see how accurate those forecasts were in conclusion then I think the backdrop for

Stocks in 2024 is one of improvement it looks like policy rates certainly in the US have pretty much topped out and we’re now thinking about cutting interest rates which is good for stocks the only worry is that it’s going to stay higher for longer if we get a secondary spike

In inflation so it looks like the central case anyway is that inflation’s going to be falling the earnings recession is over for US Stocks that’s good news as well valuations are still high for the US and India that doesn’t usually stop markets but it does sometimes produce a bit of a break on

Returns longterm if there’s too much Euphoria so I think that is a moderating influence on returns India too is very expensive right now however other regions other sectors look much more reasonable so us small caps for example the UK Germany Poland many regions in EM also look quite reasonably priced so

Maybe 2024 will be a chance for these Left Behind markets to kind of catch up with us growth stocks and the Magnificent Seven so I’d say the central case is that rates kind of go sideways maybe start to fall a little bit inflation generally starts to fall and

Of course here I’m talking about disinflation not falling inflation not deflation so it’s the rate of inflation which is lower and if that’s the case then I think it’ll be a good story for stocks generally for Global stocks but also for developed Market government bonds because High inflation is toxic

For government bonds so if growth looks okay and inflation’s falling that would be good for bonds too probably what’s going to happen is that growth will again start to perform well as it did in 2023 when interest rates fall usually it’s growth which outperforms and that’ll probably beat quality and value

As alternative styles of investing I’d say a tail risk is that we get something like a credit crisis may be triggered by the commercial real estate market in the US and elsewhere which could spread out to the banking system particularly Regional Banks and the FED could have to

Step in again to save the Deb in that case there’d be a pullback in Risk appetite that would not be good for stocks gold would probably do well develop Market government bonds again would probably do well if there wasn’t High inflation and quality and income would probably beat growth as an

Investment style so really depends on which of those two things you think is most likely to be the outcome in 2024 so I hope that’s given you a bit of help making up your own mind about what’s going to happen to markets in 2024 remember those base rates most most of

The time it’s best not to rely on forecasts and to instead think about what happens to returns over the long term so those 10e forecasts I think are more important than one year ahead broker forecasts for the S&P 500 say now don’t forget if you do enjoy our content

Please do subscribe to our Channel and like this video and don’t forget our membership our premium membership on our website just go to pensioncraft tocom to learn more about that and do join our community in 20 24 and as always thank you for listening