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Outlook 2024: drivers and risks   By Edwin Lo Chief Investment Officer

UFS Chief Investment Officer, Edwin Lo, reflects on the year that was and outlines why quality assets and fixed income will be key areas of focus for 2024.      2023- review The past year was yet another extraordinary one for investors. The combination of economic and market factors served to fuel a rally in both bonds and equities.  The main driver of this rally was the belief that global inflation has reached its peak, with major developed economies expected to experience a ‘soft landing’ as recessionary fears recede.  The economic landscape in Australia proved to be more resilient than expected in 2022/23, underpinned by a strong labour market and robust household savings.  Nevertheless, there was tangible deterioration in the global economy, driven by central bank actions to moderate inflation, with the tightening of interest rate policies slowing economic activity. The weakening of growth drove an inversion to yield curves, implying lower interest rates at some point in the future.   While corporate earnings were affected by these adverse economic conditions, profit growth continued, albeit at a slower pace. Selectivity and a flight to quality, particularly in companies with resilient balance sheets, were the keys to success in this volatile financial market.  In the second half, the demise of regional banks in the US and Credit Suisse in Europe did not cause significant disruption to the global financial system. However, geo-political tensions remained extremely high on the agenda, with ongoing conflicts in the Middle East and Ukraine threatening global stability.   Over 2023, most of the asset classes generated positive gains. Bond markets have staged a significant turnaround while optimism about generative artificial intelligence produced an outsized return within global equities.    Asset class returns (as of 29 December 2023)  Asset class 1 year 3 years pa 10 years pa Income       Australian bonds and credits 5.07% -2.68% 2.65% Global bonds and credits 5.32% -3.10% 2.62% Growth       Australian equities 12.42% 9.26% 7.93% Global equities 23.30% 11.81% 11.68% Interest rates       Australia cash rate 4.35%* 0.10% 2.50% USA Fed Funds rate 5.31%# 0.08% 0.08%   * The Reserve Bank of Australia, December 2023  # The Federal Reserve, USA, December 2023  2024 - outlook While there are signs that inflation may be abating, policy rates are not about to quickly march back down to a steep cut due to concerns about the persistence of inflationary dynamics that may have become embedded in the economy. However, weaker demand should help inflation converge towards Central Banks' targets.  Growth is expected to be subdued as tight monetary conditions begin to impact consumers and businesses. Market consensus is that monetary policy is currently sufficiently restrictive and a gradual return to normalisation should help to curb a wage-cost spiral. A significant shift in monetary policy stance is not expected in the new year.  From a macroeconomic and geopolitical perspective, the global economy remains vulnerable to external shocks. With the rise in geopolitical tensions, along with unstable energy prices and currencies, investors should be aware of potential risks. Corporate earnings and asset valuations will be set for a volatile period and high-stakes presidential elections in the US, the EU and Taiwan, will add further uncertainty to a handful of geopolitical scenarios this year.  Responsible investments deliver long-term value to investors. Despite challenging market conditions, UFS will continue to increase its allocation to clean energy and adjacent technologies. UFS intends to further strengthen efforts with dedicated climate strategies to align with Task Force on Climate-related Financial Disclosures (TCFD) recommendations and requirements.  Against this backdrop, our investment funds are oriented towards high-quality equity portfolios with low volatility. The approaching end to monetary tightening could provide more headroom for a new cycle of equity gains. However, due to the subdued growth outlook and the over-valuation of some markets and sectors, we will choose to be more conservative and reduce our overweight stance in equities to neutral.  With inflation expected to peak, this substantiates the investment case for adding duration to the bond portfolios. Fixed income should deliver returns in line with income yields, which has helped stabilise returns. In credit, we will maintain exposure to global investment-grade papers, which should provide a supportive backdrop. The team is actively looking for opportunities in senior and secured private credit strategies in a way that enhances portfolio return and improves fund diversification.  Decarbonisation is becoming more urgent. Embedding the vision of UCA Synod NSW and ACT with UFS investment beliefs, we have a strong focus on ethics and the UN Sustainable Development Goals when constructing our portfolios across all asset classes. A key priority in FY24 is to increase our engagement efforts, assessing and validating the sustainability solutions of companies seeking to transition to a carbon-neutral investment outcome by 2050. Also on the agenda are bank lending practices and work on human rights and labour practices.  Applying these considerations, our asset allocation for FY24 is as follows:     Asset Allocation    Asset Class              Overweight Neutral Underweight Equities       Australian       International       Fixed income       Rates       Investment grade       High yields       Real assets       Infrastructure       Real estates       Private equity       Private debt       Cash       Summary 2024 will be the year of change and transition. Investors should prepare for near-term volatility and build diversified portfolios with a long-term view through multiple sources of return to enhance consistency and reduce risk. Wide dispersion in valuations and corporate profitability will lead to higher equity volatility. Against this backdrop, the funds are actively positioned for stability and favour a return to income-oriented strategies with an overweight position in bonds, investment-grade fixed income, and real assets such as infrastructure and private debt.   Important information: The Uniting Financial Services (UFS) unregistered managed investment schemes are available for investment only to wholesale investors. Prospective wholesale investors who wish to invest via our unregistered managed investment schemes can access the Information Memoranda for these any of these funds on the UFS website. While the information in this email has been prepared with all reasonable care, UFS accepts no responsibility or liability for any errors, omissions or misstatements however caused. No action has been taken to register or qualify these products or otherwise permit a public offering of these products in any jurisdiction outside Australia. Past performance is not indicative of future performance.

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  Important for you to know Financial services are provided by The Uniting Church (NSW) Trust Association Limited ACN 000 022 480, ABN 89 725 654 978, AFSL 292186 (“UCTAL”) and by The Uniting Church in Australia Property Trust (NSW) ABN 77 005 284 605 (“UCAPT”) (together and separately “Uniting Financial Services”), for The Uniting Church in Australia, Synod of NSW and the ACT (“Synod”), under a s.911A Corporations Act 2001 (Cth.) authorisation and pursuant to APRA Banking Exemption No. 1 of 2021 and ASIC Regulatory Guide 87 and ASIC Corporations (Charitable Investment Fundraising) Instrument 2016/813 exemptions. Uniting Financial Services® is a registered trademark of UCTAL used with permission of UCAPT. None of The Uniting Church in Australia, UCAPT and UCTAL is prudentially supervised by APRA. Therefore, investments with or contributions to these Uniting Church organisations will not receive the benefit of the Financial Claims Scheme or the depositor protection provisions in the Banking Act 1959 (Cth.). All financial services and products are designed for investors who wish to promote the religious and charitable purposes of Uniting Financial Services and The Uniting Church in Australia and for whom profit considerations are not of primary importance in their decision to invest. The information on this page has been prepared without considering your objectives, financial situation or needs. You should, before acting on it, consider its appropriateness to your circumstances or refer to the relevant disclosure document. Loan applications are subject to credit approval. Interest rates are subject to change. Fees and charges may apply. 

Kindly note that the information on this webpage is only intended for wholesale, professional or sophisticated investors (as defined in the Corporations Act). Please do not refer to this webpage if you are not one of these investors. Uniting Financial Services is not providing any personal advice or recommendation regarding any financial products described or referred to on this webpage. Prospective investors should make their own enquiries and should seek all necessary financial, legal, tax and investment advice. Past performance is not indicative of future performance, all information contained on this wepbage is current at the date of publication, however may be subjected to change without notice.