Bob Homan: Help, our vision is already coming true!

December 12, 2023

^{This column was originally written in Dutch. This is an English translation.}

By Bob Homan, Head of the ING Investment Office

The investment view is not an exact science, only a guideline. The strong returns of the past month prove this.

The new year is fast approaching and most asset managers, banks and other market researchers have already announced their vision for 2024 a month or so ago. And while it is a vision for the next year, you cannot separate the current market movements from that. The market movements since the outlooks were released have been too strong for that. A diversified bond portfolio gained about 4%, global shares even 6%.

Is the cake finished already?

Last month we also published a vision for the investment year 2024. Based on our estimates of the interest rate path to be followed, the profit growth development and the development of valuations, we arrived at a return of 7% for a diversified bond portfolio and 9% for global shares. However, with the aforementioned price movements over the past month, most of the expected returns have already been realized. What does this mean for 2024? Is the cake now gone?

There are different ways to deal with this. You can say 'fine, part of the vision has already come true' and you subtract the realized return from the expectations. Voilà, a new forecast. Yet that doesn't seem to be the way. Because if we then have two bad weeks, then we definitely have to take them off again? A second option is to increase expectations for 2024, in order to continue to provide a forecast that is above the return on cash. This doesn't seem like a good idea either, given the volatility of the market.

Vision is not an exact science

No, the best solution is to be less precise with the percentages in the outlook. It is emphatically about the direction, not about predicting precise percentages. They actually give too much credit to the estimates on which the vision is based. I would therefore completely omit estimates after the decimal point.

Ergo, it is best to leave your initial estimates as they are and only see if adjustments are needed halfway through the year. In the meantime, you can further determine the tactical policy based on your vision. It is interesting to see where the market may be moving against your vision and whether there are changes in circumstances that require action.

For the time being, we assume that spreads will widen somewhat in 2024. That is why our return expectations for government bonds are better than those for corporate bonds, while we are currently still overweight corporate bonds. With the rapidly shrinking spreads in recent weeks - based on the vision - the moment of pivot is getting closer.

More columns by Bob Homan