Asset allocation is a key investment principle, rooted in the work of Harry Markowitz and Benjamin Graham. It underscores the importance of diversification, which represents the balance between return and risk, determining more than 70% of a portfolio’s performance. The distribution of capital across different asset classes, such as equities, bonds, real estate / real estate funds, and commodities, lies at the heart of this strategy.
Market trends in 2024: macroeconomic context in 2023
In 2023, the OECD forecast global economic growth of +3.0% (compared to 3.50% in 2022), reflecting a slowdown from the previous year. This deceleration was driven primarily by high inflation and major interest rate hikes by leading central banks, although China provided a boost to the global economy with a faster-than-expected economic reopening.
Most advanced economies grew in 2023, with the exception of the United Kingdom, which entered recession following sharp inflation in 2022 and the ongoing impacts of Brexit. European economies, particularly Italy and Spain, continued to benefit from the European recovery plan (Next Generation EU). A new industrial policy is allowing investments to pick up in the United States in 2024.
Among emerging economies, China and India maintained strong growth momentum. Brazil and Turkey, however, slowed notably due to historic inflation and the earthquakes that struck Turkey in 2023.
Furthermore, the tense situation between Israel and Gaza has generated global concern, adding geopolitical complexity and instability to an already uncertain environment.
Inflation, financial risks, the conflicts in Ukraine and the Middle East, and natural disasters remain the primary sources of uncertainty for 2023.
Preferred investment products for 2024
Bank rate products
Interest-bearing current account:
An interest-bearing current account is a bank account that allows its holder to deposit and withdraw funds at any time. This instrument enables day-to-day cash management, like a standard current account. The interest rate is higher than that offered by an ordinary savings account, but is often lower than that offered by a term deposit or a capitalisation contract.
Term deposit:
A term deposit is a savings account that offers a fixed or variable interest rate for a set period. This instrument allows you to withdraw your funds at any time within a 32-day notice period. The interest rates offered by term deposits are higher than those offered by interest-bearing current accounts or standard savings accounts.
Capitalisation contract:
The capitalisation contract is the equivalent of life insurance for individuals (the second most popular retail savings product after the Livret A) for legal entities. Under this contract, you can switch (arbitrate) your funds between the insurer’s euro-denominated fund and your unit-linked accounts (term deposits, funds, structured products, etc.). The capitalisation contract is often used for long-term savings objectives, although funds can be withdrawn within a maximum of 30 days. It also offers certain tax advantages.
Defensive equities (Safe-Haven Stocks)
Some believe it is preferable to avoid equity markets during periods of uncertainty, but there are defensive sectors that tend to perform well regardless of broader market conditions. These sectors are considered by some to be safe-haven investments.
So, what is a safe-haven stock? To identify one, look for shares in companies that produce goods with inelastic demand, products whose demand does not vary significantly in response to price fluctuations ¹. Consumer staples, utilities, supermarkets, and so-called “sin stocks” (non-ethical stocks) are examples of defensive equities that tend to perform well during economic downturns ². Companies producing these goods share the common trait of selling products whose demand is generally not significantly affected by economic slowdowns and will therefore continue to perform during such periods.
¹ Defensive stocks • Finance Héros.
² How to invest in defensive stocks – Admirals.
Example: Analysis of the share prices of L’Oréal (cosmetics industry) and Danone (food industry).
As shown in the charts below, the share prices of L’Oréal and Danone experienced a continuous rise from mid-October 2023, just days after the Hamas attack on Israel (October 7, 2023). This rise reflects investors’ tendency to turn toward safe-haven stocks in times of severe instability.
Precious metals
Metals such as gold and silver have traditionally been used as safe-haven assets during periods of crisis, acting as a hedge against conflict-related financial volatility and preserving asset values. In wartime, government currency devaluation to meet military costs can erode investors’ purchasing power, while gold and silver retain their value.
Bond ETFs
If you wish to invest in bonds, consider investing in Bond ETFs (Exchange-Traded Funds). Bond ETFs are exchange-listed investment funds that invest in bonds. They can track a bond index or follow a specific investment strategy.
Investment-grade bonds tend to be less risky but offer lower yields, while high-yield (non-investment-grade) bonds tend to carry more risk but offer higher returns ³.
Here are some bond ETF options that may be of interest:
iShares Core U.S. Aggregate Bond ETF (AGG): Tracks the Bloomberg Barclays US Aggregate Bond Index, which measures the performance of US Treasury bonds, corporate bonds, and mortgage-backed securities.
Vanguard Total Bond Market ETF (BND): Tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, measuring the performance of US Treasury bonds, corporate bonds, and mortgage-backed securities.
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD): Tracks the Markit iBoxx USD Liquid Investment Grade Index, measuring the performance of investment-grade corporate bonds.
Cryptocurrencies
Cryptocurrencies are highly volatile assets whose value can fluctuate significantly over short periods. However, some periods are more favorable than others for investing in them. For example, during periods of financial market stress, cryptocurrencies have tended to rise in value, acting as safe-haven assets. In an uncertain geopolitical context, it is advisable to favor assets that are less influenced by geopolitical conflicts.
This rise in cryptocurrencies is largely explained by speculators anticipating the emergence of Bitcoin-linked Exchange-Traded Funds (ETFs). These tracking instruments will allow investors to gain exposure to Bitcoin without directly holding the cryptocurrency, while benefiting from its associated liquidity.
Defining your risk profile
It is important to assess the risk associated with each financial product, as each differs in its overall risk level.
Asset allocation in wealth management involves distributing an investor’s assets across different investment categories. A well-designed allocation enables better portfolio performance while limiting risks.
Different asset classes perform at different times and are lowly correlated. For example, the bond market may outperform equities one year, while equities may outperform bonds the next.
The more equities you hold in your portfolio, the higher the potential return and the associated risk. Conversely, reducing the equity share in your portfolio leads to a reduction in both potential return and risk.
Understanding assets requires studying their potential returns and associated fees. Depending on needs, savings amounts, and management preferences, some products are better suited than others.
To define your risk profile in line with your needs and objectives, several parameters are considered, including investment horizon and investment objective.
There are several types of risk profiles:
Cautious profile: Portfolio composed primarily of UCITS (Undertakings for Collective Investment in Transferable Securities). A maximum of 25% in equity unit-linked investments. All assets are relatively stable, the risk of loss is low, and volatility remains contained. Returns on this portfolio are modest.
Balanced profile: Portfolio composed primarily of bond products and equities. With this type of profile, it is preferable to invest over the long term to optimize capital appreciation.
Dynamic profile: Portfolio composed of 75% international equities with a highly diversified asset allocation. This portfolio is more volatile but offers significantly higher returns.
Determining an appropriate risk profile is a fundamental pillar of portfolio management. By evaluating parameters such as investment horizon and financial objectives, investors can shape their asset allocation approach in line with market realities.
Low-Risk or risk-free investments
When it comes to growing capital, many seek investment options offering security and stability. Low-risk or risk-free investment products are designed to meet these needs and are particularly favored by investors who wish to avoid major market fluctuations and minimize potential losses. The table below allows you to compare various low-risk or risk-free investment options, highlighting their key characteristics.
These low-risk or risk-free investment options offer modest returns while aiming to preserve your capital. It is important to consider the investment horizon, expected rates of return, and fund availability timelines when selecting the solution that best matches your financial objectives and risk tolerance.
Investing in 100% capital-guaranteed products: With Fintis, invest with 100% capital protection through our cash & cash equivalent products or our capital-guaranteed investments at a fixed or variable rate.
Conclusion
Anticipating market trends and adjusting asset allocation accordingly is essential to maximizing opportunities and minimizing risks in 2024. The macroeconomic context of the previous year has left significant imprints, requiring careful analysis of economic developments and strategic adaptation.
Market trends for 2024 highlight the importance of remaining agile. The ability to adjust asset allocation in response to economic developments is a valuable asset. Keeping a close eye on emerging opportunities and potential risks enables informed decision-making.
Ultimately, managing a portfolio in 2024 will require not only a deep understanding of the economic context, but also strategic flexibility. By adapting one’s investment approach to changing realities, investors can better position their portfolios to meet the challenges of the year ahead. Whether in pursuit of growth or capital preservation, asset allocation remains the preferred tool for shaping a prosperous financial future.
