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From Cash To Crypto: An Asset Class Outlook For 2024

Last Updated December 24, 2023 11:12 AM
Giuseppe Ciccomascolo
Last Updated December 24, 2023 11:12 AM

Key Takeaways

  • Cash, crypto, bonds, equities, gold: which asset will shine in 2024?
  • Here’s how these assets performed in 2023.
  • An analyst shares his view on what to look at next year.

As we approach the end of 2023, the financial landscape is undergoing a significant transformation, with cryptocurrencies emerging as a major player in the global economy. While traditional assets like stocks and bonds have long been the cornerstone of investment portfolios, cryptocurrencies are rapidly gaining traction, attracting both retail and institutional investors.

What to expect from the next year? Laith Khalaf, head of investment analysis at AJ Bell , looks at the prospects for four key asset classes, and crypto, in 2024.

Cash

As we potentially witness the peak of interest rates, a parallel trend may be unfolding in the realm of cash returns. While the apex of flows into this asset class remains uncertain, the allure of decent returns coupled with negligible risk has certainly captivated yield-seeking savers. Despite market expectations projecting several interest rate cuts in the UK for the upcoming year, these forecasts are vulnerable to disruption by unforeseen data points that challenge the prevailing narrative.

Khalaf said: “If inflation is truly licked and looser monetary policy starts to materialize, instant access cash rates will fall back. Fixed-term cash rates will fall first though as they anticipate future interest rate changes to a greater degree. Indeed we have already seen fixed term rates coming off the boil, with the average one-year bond now offering 5.2%, down from a high of 5.5% in October, according to Bank of England data.”

He added: “It looks likely that in 2024 we’ll reach an inflection point where the best rate on fixed term bonds falls below that on instant access accounts. Indeed the two have already started converging. Without being paid a premium to lock their money away, savers will probably turn away from fixed term bonds in favor of instant access accounts,” he added.”

In 2021, the Financial Conduct Authority (FCA) embarked on a mission to steer individuals with substantial assets away from idle cash holdings and towards investment opportunities. Their objective was to reduce the number of consumers with a higher risk tolerance holding more than £10,000 in cash by 20%, aiming to trim this figure from 8.6 million in 2020 to 6.9 million by 2025. Interestingly, the regulator’s timing coincided with a dramatic fifty-fold increase in cash returns over the past two years, making the task more formidable.

Barclays’ historical data  dating back to 1899 reveals a compelling statistic: over 10 years, shares have a nine in 10 chance of outperforming cash. This underscores the rationale for maintaining equities in the long term. However, the argument has become more challenging to convey in the face of rising interest rates, altering the landscape from the initial era when cash returns commenced at zero.

Equities

2023 marked a buoyant year for global equity markets. This has been fueled largely by the anticipation of artificial intelligence ushering in another tech boom. Concerns regarding the valuations of the US stock market, particularly a select group of major tech companies, are gradually losing traction as robust performance persists. The adage “if you can’t beat them, join them” resonates, and there may well be value investors eager to pivot if it could be done without a loss of reputation.

Khalaf said: “The potential for the Fed to cut interest rates in 2024 should be positive for growth stocks, but probably of equal significance is for the tech titans to keep pumping out earnings growth to keep the punters happy.”

Perhaps a concerning sign was NVIDIA’s third quarter results, in which the chip company hugely outstripped analyst expectations and lifted its fourth quarter guidance, only to see its share price slide.

Khalaf added:”It feels like the market might be wanting ever more miraculous acrobatics in order to elicit a round of applause. Certainly the rich valuations placed on the tech sector leave little room for error in operational performance, and any slip ups could consequently be harshly punished.”

UK Stock Market Languished

In stark contrast, the UK stock market languishes. It is grappling with a lack of favor and subdued sentiment among domestic retail investors, evident in fund flows. Contributing to this inertia is the FTSE’s composition, dominated by banks, mining, and insurance companies. Its make up sees it seemingly staid and Victorian compared to the dynamic tech innovators of the NASDAQ. Prospects for 2024 offer no indication of a reversal in the longstanding aversion to the UK stock market. Moreover, the UK’s diminishing presence in the MSCI World Index allows global investors to bypass it with relatively low risk against their benchmark.

This doesn’t imply that the UK market cannot make strides, as demonstrated by its 6% return in the past year. However, it may not dazzle compared to other regions, particularly the robust performance of the US and Japan making inroads.

Despite its subdued outlook, the UK remains a haven for dividends, providing investors with a tangible incentive while awaiting a turnaround in fortunes. These dividend payments also act as a bulwark against undervaluation, as a consistent cash income stream inherently upholds currency. Additionally, the UK’s medium and smaller companies have exhibited strong long-term performance, although they currently grapple with the same challenges affecting their larger counterparts.

Bonds

It has been a peculiar year for government bonds following the tumultuous events of 2022. Recent speculations about potential interest rate decreases has propelled the UK gilt market into positive territory for the year. The present 10-year gilt yield hovers around 3.7%, roughly mirroring its position at the start of 2023. It has, however, experienced a fluctuating journey, briefly reaching 4.7% over the past 12 months. Notably, short-dated gilts have garnered favor among retail investors. They have outperformed some of their longer-dated counterparts, with the current two-year gilt yield standing at 4.3%.

Khalaf said: “Assuming inflation continues to fall away, the yield curve can be expected to move towards a more normal shape which rewards investors for taking on duration risk. How quickly and how far this trend goes will largely depend on the path of UK interest rates.”

He added:”In the meantime, gilts are now offering a much more appealing return than they did for almost all of the noughties, but for retail investors the yields on offer are probably less alluring than cash. Except that is for low coupon short-dated gilts, which offer a tax wheeze for the initiated, and which have proved popular with DIY investors in 2023.”

While the attractiveness of gilt yields is evident, it’s crucial to temper this enthusiasm with an acknowledgment of supply risks. This is particularly true in an election year when uncosted spending promises could unsettle markets. Despite indications that both major political parties will uphold fiscal prudence, the campaign trail is notorious for surprises.

The existing ample supply of gilts resulting from ongoing government borrowing is further compounded by the Bank of England’s gradual divestment of gilt holdings in its quantitative easing (QE) program. This has, effectively, increased supply and potentially exerted pressure on prices.

Although insurance companies and pension funds traditionally absorb a significant portion of gilt issuance, the government is actively encouraging pension funds to diversify their investments into UK companies. This strategy involves reducing their reliance on government bonds, and their customary investment terrain.

Gold

It has indeed shaped up to be a positive year for gold, delivering double-digit returns in dollar terms. Yet, the dollar’s weakness has played a pivotal role in propelling gold prices. This has resulted in returns for UK investors in sterling terms at approximately half of their dollar counterparts. They are standing at around 6% for the year, before accounting for charges.

Once again, the trajectory of interest rate policy has been a decisive factor influencing gold pricing. The anticipation of declining interest rates, particularly in the US, serves as a tailwind for gold. This reduces the opportunity cost of holding this precious metal, which generates no income. The recent 10% surge in gold prices suggests the market has already factored in the potential for interest rate cuts. Therefore, the progression in 2024 will be contingent on the timing and extent of such rate adjustments.

Khalaf said: “Government debt dynamics may also play a role in the fortunes of gold, as any further credit downgrades for the U.S. would be negative for the U.S. Treasury market, a key competitor for gold. However, the likelihood of a US default is still so slight that the effect of any deterioration in its fiscal position will probably be marginal,” Khalaf said.

US Downgrades Effects

The US received downgrades by the credit ratings agency Fitch in 2023. A credit outlook reduction by Moody’s occurred, too. That didn’t stop the US 10-year bond yield from falling from a peak of 5% to under 4% today. Gold bugs are probably better off hanging their hat on a hard landing for the US and global economy, which would spark a flight to safe-haven assets, including gold.”

While investors usually look at gold as a safe haven, they should exercise caution not to conflate this with price stability. Investors often flock to the precious metal during financial turmoil but it’s crucial to recognize that gold is inherently volatile. Therefore, significant losses can occur. Historical instances, such as the gold price plummeting by over 60% between 1980 and 1982 and a roughly 45% decline between 2011 and 2015, underscore its susceptibility to sharp fluctuations. After peaking in 1980, it took 27 years for gold to regain its former high.

Crypto

Khalaf said: “Crypto has been on the charge this year, despite numerous scandals and ongoing global regulatory pressures. In the UK the government is pressing ahead with plans to regulate many crypto activities in line with existing financial services, resisting a call from the Treasury Select Committee to treat crypto activities as gambling. Actually, increased regulation might be a positive for crypto, potentially opening up fresh pools of capital and fostering greater confidence amongst consumers.”

In 2024, a significant event looms on the horizon for Bitcoin. The halving will see the reward for mining the cryptocurrency cut by 50%. This will lead to a reduction in the fresh supply of Bitcoins entering the market. Supporteds of Bitcoin are likely to cite this event as a major positive driver for the cryptocurrency’s price.

However, the halving is not a sudden revelation to the supply side, given that these events occur every four years. In an efficient market, prices should already factor in such changes. Nevertheless, the remarkable price volatility in Bitcoin, occasionally triggered by external factors, challenges the assumption that markets consistently act as rational interpreters of all available information.

Looking ahead, the widespread adoption of cryptocurrencies, whether as assets or currencies, remains highly speculative in the long run. Consequently, prices may remain exceedingly volatile, heavily swayed by sentiment. The recent surge in prices, coupled with the impending halving, is poised to grab headlines and attract speculative interest.

Historical patterns indicate that media frenzies can both fuel and be fueled by escalating Bitcoin prices. The critical question, however, revolves around how many investors in these fervent periods ultimately emerge with a profit. The enduring wisdom prevails – one should not wager more than they are willing to lose.

Disclaimer

Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.

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