Where are the investment opportunities in 2024?

This post was created in partnership with FSMOne. All views and opinions expressed in this article are Beansprout's objective and professional opinions. FSMOne is the B2C business division of iFAST Financial Pte Ltd ("iFAST"), the Singapore subsidiary of SGX Mainboard-listed iFAST Corporation Ltd.

What happened?

Investors seem quite certain that interest rates will fall next year. 

We’ve seen global bond yields fall sharply since November, as investors gained confidence that the Fed is done with rate hikes. 

The yield on the 6-month Singapore T-bill also declined to 3.74% in the latest auction on 7 December. 

According to the CME Fedwatch Tool, investors are now largely expecting that the first Fed rate cut will happen in March 2024. 

In fact, investors are forecasting that there will be six rate cuts next year, bringing the Fed funds rate to 3.75% to 4.00% in end 2024. 

This has led to a rally in the US stock market, with the S&P 500 reaching its 2023 closing high on 14 December with gains of 23% year-to-date. 

This naturally led us to wonder – if investors so confident that there will be aggressive rate cuts next year, what will happen if the opposite happens?

If interest rates were to stay higher for even longer, what would it mean for our investments? 

As we make financial plans for different scenarios in 2024, we’re thankful to be able to access the insights of many experts.

Here’s what the iFAST research team is projecting may hold for investors in the coming year. 

#1 – Short term bonds may remain attractive

If you have been following Singapore T-bills and Singapore Savings Bonds (SSBs), you would probably have noticed that yields of short-duration bonds are higher than long-duration bonds. 

For example, the cut-off yield on the 6-month Singapore T-bill was 3.74% on 7 December. 

However, the January issuance of the SSB offers a 10-year average return of just 3.07%. 

Likewise in the US, the 2-year US government bond is offering a yield of 4.7%, higher than the 4.3% yield on the 10-year US government bond.

In the event that inflation remains persistent and the Fed does not cut interest rates as much as expected, the yields on short-duration bonds may remain elevated. 

While investors have been keeping a close watch on the Singapore T-bill, iFAST believes that investors can also consider funds that offer exposure to bonds with a relatively short duration. 

This may allow us to diversify our portfolio beyond T-bills, and earn a potentially higher yield. 

For example, the United SGD Fund has a weighted average yield to maturity of 4.77% as of 30 September 2023, while the Nikko AM Shenton Short Term Bond Fund has a weighted average yield to maturity of 5.48% as of 31 October 2023. 

#2 – Singapore REITs may continue to face headwinds

Investors of Singapore REITs have had a bumpy ride in 2023. 

After falling for most of the year as higher interest rates led to concerns about rising finance costs and lower distributions, Singapore REITs bounced strongly in November on rate cut expectations. 

This led many to ask if we should rush to buy Singapore REITs now.

While the valuations of Singapore REITs look attractive, we should remain mindful of the risks if interest rates do not fall as much as expected. 

For example, Singapore REITs may see the value of their properties eroded if interest rates remain elevated. 

According to analysis by iFAST, the property valuations of the top 10 Singapore REITs by market capitalisation may fall by an average of 20%, if capitalisation rates were to increase by 1%.

The capitalisation rate is the expected rate of return generated by a property asset, and may go up if interest rates were to rise. 

With a lower valuation of property assets, the leverage of these Singapore REITs may then increase, putting them at risk of breaching the regulatory gearing limit of 50%. 

In addition, some Singapore REITs may face higher borrowing costs when lower cost debt locked in a few years ago mature.

With these risks to consider, iFAST believes that it may be prudent for investors to think twice (or thrice) about buying Singapore REITs. 

#3 – Look out for opportunities in stock market

However, it is not all doom and gloom even if interest rates stay higher for even longer. 

There are still opportunities in the stock markets that remain attractive. 

Many investors have been focused on the spectacular share price performance of the Magnificent Seven – Apple, Amazon, Alphabet, Meta, Tesla, Nvidia and Microsoft. 

iFAST believes that these tech stocks may potentially see more gains due to the upside from AI, as well as other megatrends like cloud computing.

As a result, iFAST has upgraded the star rating for the Digital Economy to 4.0 Stars “Very Attractive”. 

The rapid adoption of artificial intelligence is also expected to bring a new revolution in the seminductor industry.

This is expected to drive a 40% year-on-year increase in chip sales by the second quarter of 2025. 

As such, iFAST has upgraded the semiconductor industry to 3.0 Stars “Attractive” 

The Japanese stock market has seen stellar performance this year, with the returns on the Nikkei 225 index exceeding 20% year-to-date (as of 23 October 2023). 

This has also led some investors to wonder if it might be too late to buy into the rally.

iFAST believes that there may be more upside for Japanese stocks as the economy shifts from deflation to inflation. 

This is expected to result in positive shifts in consumption and investment patterns, further driving economic growth. 

What would Beansprout do?

As we head into 2024, it is important to review our investment portfolios as the economic backdrop continues to evolve. 

While the commonly held assumption is that interest rates will start falling next year, we should still plan for scenarios where interest rates remain higher for even longer. 

In such an event, iFAST has recommended that we consider the following strategies

• Look at short term bonds over long term bonds
• Be selective in Singapore REITs
• Find opportunities in the stock markets including in Big Tech, the semiconductor industry, as well as in Japan 

We would spend more time to understand these developments to make sure we make an informed investment decision, and are glad to be able to hear directly from the iFAST team in the upcoming FSM Invest Expo 2024.

The in-person investment event will be held on 6th January 2024 at the Suntec Convention Centre. Apart from learning through the talks, you will also get a chance to interact with experts from major asset managers and fund houses to gain practical investing insights. You can also enjoy exclusive event-only deals including lucky draws and sure-win prizes with over $20,000 worth of prizes to be won. 

Sign up for the FSM Invest Expo 2024 and recharge yourself for the next lap of your investment journey!

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