Issue link: https://info.seic.com/i/1513994
© 2024 SEI ® 3 What we're watching Outside of North America and Europe, one of the potentially big events of 2024 may be policy reversal from the Bank of Japan and the strengthening of the Japanese yen. Japanese policy makers have thus far resisted the pull of high inflation, refusing to abandon the zero bound (the policy interest rate has been below 0 for six years). We believe that will change early in 2024. This should result in a stronger currency, which may serve to increase volatility in the New Year as the cheap Japanese financing and carry trades start to unwind. China was a disappointment throughout 2023, as the economy struggled under the weight of a bursting property bubble, equities continued to underperform, and stimulus measures failed to materialize. Despite relatively attractive valuations, we remain patiently underweight. Regarding fixed income, interest rate volatility remains extremely high as developed market 10-year yields fell roughly 100 basis points from their October highs on perceived dovish turns from policy makers (particularly in the U.S.) Our top-down view has us shunning duration risk as we see the rally in yields as overdone based on our expectation that inflation will not settle below target for long and central bankers will not deliver on the expected number of rate cuts. In addition, we see basic supply and demand as being an underappreciated negative for the coming year. In short, deficits are rising despite the broadly positive economic performance of 2023 and debt issuance in 2024 will be heavy. We see more sellers than buyers as central bank are diversifying their holdings and the fourth-quarter rate rally (prices rose and interest rates fell) may have dampened investor's appetites. From a bottom-up perspective, the interest-rate positioning in our portfolios remains modest and mixed around at index-like levels. Credit markets look somewhat vulnerable in 2024 as yield spreads remain tight and early warning signs are appearing in the form of rising default levels. Our investment-grade portfolios remain defensively positioned by favoring the securitized sectors over corporate exposures. Our high-yield portfolios also maintain a somewhat defensive posture and continued to shed CCC rated issuers into the year-end rally. Lastly, we maintain our favorable view of commodities on heightened geo-political risks, OPEC cuts and positive economic growth in the short term along with higher average inflation and the effects of structural underinvestment over the longer term. In closing, we would like to wish everyone a healthy and happy 2024. Summary views Indexes U.S. equity=S&P 500 Index, Global ex-U.S. equity=MSCI ACWI ex-U.S. Index, Global treasuries=Bloomberg Global Treasury Index, Commodities=Bloomberg Commodity Index, U.S. tech sector=S&P 500 Information Technology Sector Index, Equal weight S&P 500=S&P 500 Equal Weight Index, U.S. small cap stocks=Russell 2000 Index, Gold=Bloomberg Gold Index, Bitcoin=Coinbase Bitcoin. Macro/Cross-asset • Inflation will remain higher than expected, driven by services and wages. • Monetary policy will disappoint investors, with the Fed delivering only a few rate cuts. • A plentiful supply of government bonds will put upward pressure on interest rates. • The BOJ will finally raise rates to stem inflation; a yen rally will induces foreign exchange volatility. • Commodities rebound in 2024 on the strength of economic growth momentum in the first half of the year. Equity • We emphasize diversity in equity positions; issuer, sector, and geography. • Strategic holdings in value, quality, momentum, and low volatility are in place. • We anticipate slightly increasing our value exposures relative to 2023. • The sector focus in our portfolios reflects our factor exposures. Broadly, it includes financials and materials (value), discretionary (momentum and quality) and staples (low volatility). • Remain patiently underweight China. Fixed income • We see the potential for higher interest rates in 2024, leading us to relatively neutral duration positioning. • Securitized sectors remain a favored (higher-quality) position relative to corporates.