Justin Onuekwusi, chief investment officer at UK wealth manager St James’s Place, shares his latest investment insights and views on the economic outlook in 2024, with a focus on the timing of a potential interest rate cut. Close Brothers Asset Management, abrdn and Quintet Private Bank also share their views on this.

Despite the election outcome offering more clarity on the UK’s political direction, Justin Onuekwusi at St James’s Place recently highlighted that economic challenges remain. Interest rates are going to stay in the spotlight, and that will impact investment planning.

“Current expectations suggest a fall in interest rates towards the end of the year. But even if rates come down, they are unlikely to return to pre-pandemic levels,” Onuekwusi (pictured) said in a note.

“As we chart a course through this higher-for-longer era, our priority remains clear: to manage the impacts thoughtfully and strategically, ensuring that clients’ investments are well positioned for both the challenges and opportunities that lie ahead,” Onuekwusi added.

Interest rates
Onuekwusi said that attention is focused on how quickly and easily central banks can reverse course. “In June, Canada became the first country in the G7 to cut rates, suggesting it believes inflationary pressures are subsiding. The European Central Bank opted to lower rates soon after, indicating a similar sentiment,” he added.

“In the UK, consumer price inflation has fallen back to the Bank of England’s 2 per cent target, but service sector inflation remains over 5 per cent. Before the bank decides to relax its monetary policy, it will want to ensure inflation is fully under control," he said. Consequently, Onuekwusi believes that the first cut could be delayed until the autumn. His views have been echoed by other wealth managers. Isabel Albarran, investment officer at Close Brothers Asset Management expects to see a cut in September, after the UK annual consumer prices index inflation came in at 2 per cent for June, slightly higher than the consensus expectation for 1.9 per cent, and unmoved from 2 per cent in May.

Currently markets are only pricing in a 35 per cent chance of a cut in August. However, Daniele Antonucci, chief investment officer at Quintet Private Bank (parent of Brown Shipley) believes that the UK inflation print is likely to cement market expectations that the Bank of England will begin its rate cutting cycle in August. Luke Bartholomew, deputy chief economist, abrdn also expects a rate cut in August.

Inflation has also proved even stickier in the US, hovering around 3 per cent compared with the US Federal Reserve’s 2 per cent target. “This could mean we see an even more cautious approach to cuts from the Fed,” Onuekwusi added. Central banks globally are navigating a precarious balancing act: promote economic growth by cutting the cost of borrowing, but risk igniting further inflation. “The most widely held view is that interest rates, both in the UK and elsewhere, will decline from their current levels, but settle at a level higher than before the pandemic. In other words, a return to near-zero interest rates is extremely unlikely,” Onuekwusi said.

Equities
Historically, elevated rates have been associated with higher, not lower equity prices. This is because higher rates often come at a time of higher levels of economic growth, which can be beneficial for company profits.

“However, businesses that are heavily indebted are likely to face increased financial pressure under these conditions. Focusing on companies that are less sensitive to higher interest rates, especially those with strong balance sheets, low debt levels, and solid cash flows, can be prudent,” Onuekwusi continued.

Nevertheless, diversification across various sectors and regions remains his key priority. “Leveraging the expertise of our externally-appointed equity managers along with in-house specialists helps us to identify a wide range of potential investment opportunities,” he added.

Bonds
Interest rates have a big impact on bond yields. When interest rates are high, bonds come with higher yields because they need to be attractive enough for investors to buy them. If interest rates are expected to stay higher for longer, then the yields on existing bonds are likely to remain relatively attractive for a while. This marks a departure from recent years when low interest rates made bonds less appealing.

Onuekwusi believes that bonds can once again provide effective diversification, offering predictable returns and less volatility compared with other investment types. This improved outlook for bonds is reflected in his latest portfolio allocations.

Alternatives
Onuekwusi highlighted how alternative investments, which can include assets such as commodities, private equity, and hedge funds, offer several key advantages: “Some have a lower correlation with standard asset classes, while certain types, particularly commodities, can be effective hedges against inflation.” 

“However, with bond yields becoming more attractive, the bar for incorporating alternatives into our portfolios has been raised. This is because the risk versus return on alternatives is not as favourable as what bonds are now offering,” Onuekwusi added.

Given the possibility of one or two rate cuts this year, amidst a broader higher-for-longer outlook, Onuekwusi emphasised how sticking to core investment principles remains crucial: “Trying to guess short-term market moves or reacting to the latest news could prove costly.” 

“Ensuring we keep our investment portfolios diversified across different assets, sectors, and geographical locations will help to manage risk,” he said. This becomes especially relevant when there’s uncertainty over interest rate movements, as not all investments will react in the same way to changes. “Investment success is best achieved by focusing on long-term goals and not speculating on market reactions to interest rate changes,” Onuekwusi concluded.