Why Aussie ETF providers reckon you need an 'all-weather' portfolio in 2024

BetaShares chief economist reckons RBA will cut interest rates by 60bp this year, more than market expectations
ETF provider say investors should build an “all-weather” portfolio likely to withstand potential economic challenges
Stockspot recommends preparation rather than prediction with a diverse mix of low-cost index funds for the long term

Facing significant inflation, rising interest rates, concerns about potential recessions and multiple bank collapses, global stock markets largely succeeded in overcoming these challenges in 2023.

The majority of key worldwide stock indices saw returns in the double digits, with the NASDAQ 100 notably surging by ~44%, serving as a testament to the market’s ability to defy expectations.

Although the economic and market landscape seems more favourable now compared to the same period last year, various risks and uncertainties remain.

As such some of Australia’s major ETF providers reckon adopting a measured and balanced approach may be a wise course of action for 2024.

More RBA rate cuts than market expects

Betashares chief economist David Bassanese reckons the Reserve Bank of Australia will cut interest rates by 60 basis points this year, more than the market is expecting.

“A lower-than-expected inflation path and increase in unemployment will allow the RBA to cut interest rates in 2024, with my base case being cuts at the August and November policy meetings,” he says.

“The first move in August is expected to a larger 0.35% cut to 4% (bringing the cash rate back to quarter percentage point levels), with one further 0.25% cut in November.”

Bassanese sees stronger economic growth, lower inflation, though a modest lift in the unemployment rate. He says disinflation trends we are seeing in the global goods sector will increasingly filter through to Australia, while service sector price increases will also slow as cost pressures ease.

“Lower inflation will, in turn, help boost real household incomes, while along with RBA rates cuts will support a send half rebound in consumer spending,” he says.

Furthermore, Bassanese forecasts Aussie bonds yields to fall further as the reality of RBA rate cuts takes hold and the market prices further rates cuts for 2025.

He says While RBA rate cuts should support house prices, easing in immigrations, lift in unemployment and already poor affordability should constrain further house price gains in 2024.

And despite rate cuts Bassanese says the Aussie dollar should also strengthen, reflecting earlier and more aggressive US interest rate cuts.

S&P ASX 200 to end year at 8500

While the Aussie bourse has been off to a subdued star in January, Bassanese is confident it will go up strongly in 2024 to end the year at 8500 points.

“Although the Australian corporate earnings have been going through a soft patch due to a weakened consumer and easing commodity prices, forward earnings should start to recover this year as they begin to factor in the earnings recovery expected in FY25 and FY26,” he says.

He says lower bond yields and an improving local and global growth outlook should also support the earnings and market outlook.

“If lower bond yields encourage a lift in the PE ratio somewhat higher, say 17, the market could end the year at 8500,” he says.

Build an ‘all-weather’ portfolio

BetaShares says equities are a staple component of many investment portfolios. However, the ETF provider says adopting an “all-weather” strategy in building your investment portfolio is important and involves keeping a significant but balanced exposure to equities.

“This strategy focuses on investing in robust companies that are likely to withstand potential economic challenges,” BetaShares says.

The ETF provider says investors should consider free cash flow (FCF), which represents the cash a business produces from its operations after covering capital expenditures and working capital needs.

“Unlike profit, which requires interpretation through accounting standards, cash flows are more straightforward and less subjective,” BetaShares says

FCF is versatile, aiding growth in a robust economy through expansion, efficiency improvements, or acquisitions. In tough times, it enables debt management without depending on external funding.

BetaShares says studies indicate that companies with high FCF may outperform those with lower FCF. The Betashares Global Cash Flow Kings ETF (ASX:CFLO) invests in a portfolio of global companies with strong free cash flow.

Furthermore, BetaShares says there is no substitute for quality with quality companies typically exhibiting high returns on equity, minimal leverage, and stable earnings.

BetaShares a portfolio comprising such quality companies is likely to outperform broader market benchmarks over the long term.

The BetaShares Australian Quality ETF (ASX:AQLT) is Australia’s only passive quality ETF.

Look to treasury bonds and gold

Global X product and investment strategist Marc Jocum told Stockhead predicting what will happen in the short-term is challenging given the constantly evolving market environment.

He agrees that an all-weather diversified portfolio is the way to go for investors with share markets doing a decent job at pricing in expectations .

“But it’s quite difficult putting a price on uncertainty,” he says.

“Instead of predicting it’s best to prepare by having an all-weather diversified portfolio that can navigate whatever happens in 2024,” Jocum says.

“This means investors looking to diversify into different asset classes that have different correlations and drivers of returns.”

Jocum says two examples of diversifiers to help build an all-weather portfolio include treasury bonds and gold.

“While bonds have had a poor couple of years due to inflationary pressures and rising interest rates, things are looking more optimistic for the asset class.

“For example, US Treasury real yields are sitting in their highest 90th percentile over the past 20 years at many points in the curve.”

He says with attractive yields, and the market’s expectation of central banks such as the US Federal Reserve to cut rates, bond prices could see reasonable capital appreciation, given their inverse relationship to interest rates.

“If shares experience a tougher 2024, bonds can be the ballast to help navigate the year ahead as a key diversification pillar in portfolios.

“Shares outperform bonds overtime, just not every time.”

Jocum says gold is a safe haven asset for investors to consider in their portfolios, especially in times when stocks and bonds are highly correlated like we saw in 2022 and 2023 and especially if inflation remains sticky.

He says Australian-priced gold reached an all-time high on October 31, 2023 at at AUD $3,151 per ounce and things are looking positive for the precious yellow metal going into 2024.

“A combination of factors such as falling real yields, a weaker US dollar, strong central bank demand – primarily from emerging market institutions – and continued geopolitical risk, all buoy well for gold to be a key stabiliser in portfolios in 2024,” he says.

Furthermore, Jocum says ETFs are a great tool for investors to use to help build a portfolio that can handle different market environments.

“Having growth-oriented ETFs that focus on broad share markets or specific themes (like disruptive technology) can enhance returns, and strategically complementing them with defensive assets such as bonds and gold can provide resilience against any stormy conditions that come the market’s way in 2024,” he says.

Stay the course and be diversified

VanEck Asia-Pacific CEO and managing director Arian Neiron reckons investors should always work to have a diversified portfolio.

“If the past year taught investors anything, it’s that being selective and diversified is key to riding the economic cycle,” he told Stockhead.

“Stay the course and seek quality exposure across all risk asset classes including equities and fixed income.”

Stockspot founder and CEO Chris Brycki recommends preparation rather than prediction when it comes to financial markets.

“We believe that the best investors are those who have the humility to acknowledge the unknowable nature of the future and the discipline to adhere to an investment strategy that embraces this reality,” he says.

Brycki says the strategy at Stockspot, which is an online investment advisor which builds custom portfolios using ETFs, is straightforward.

“Invest in a diverse mix of low-cost index funds for the long term, and tune out the noise,” he says.

“In essence, focus on what you can control and leave the things you can’t to the wayside.

“I believe this approach not only aligns with the evidence but also offers a more sensible and sustainable path to financial success.”

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.