8 Investment Ideas for 2024: Morningstar

2. Small-Cap Value Stocks

Small-value stocks represent the biggest valuation opportunity in the Morningstar Style Box, according to the firm’s latest U.S. Stock Market Outlook and European Equity Market Outlook. But although small caps seem much cheaper than their large-cap counterparts, analysts recommend careful asset selection, for two reasons.

One, the asset class comprises many disparate industry groups. Two, small companies are generally more sensitive to the broad economic environment, given the preponderance of money-losing and highly leveraged companies in the small-cap indexes.

3. International Stocks

European energy companies look relatively cheap, the analysts write. The U.K., with a significant amount of the index consisting of a well-diversified group of global companies, including both cyclical and defensive components, represents good value. Although Chinese equities carry particularly low expectations, over the long term, consumer-facing Chinese technology equities trade at a substantial discount to normalized earnings and are predicted to generate excess returns against broad emerging markets.

4. Companies That Use AI

Morningstar’s analysis finds significant valuation risks embedded in AI-focused stocks, which have topped the leaderboard in 2023. However, much better valuations with earnings upside exist for "second-derivative plays," including ones that can improve margins by using AI capabilities in their products.

Analysts think this could be a way to access the emerging AI theme, with generative AI allowing companies to generate marketing content, write code and improve efficiency.

5. Bonds With Positive Real Yields

Opportunities abound, the Morningstar analysis finds. Higher yields make developed-market bonds, excluding Japan, attractive, especially shorter-dated ones where an inverted yield curve exists. U.S. agency mortgage-backed securities are appealing, given the rally in mortgage rates and significant duration extension.

But further spread-widening may occur before moving in investors’ favor if the economic environment should turn weaker. Emerging-markets debt still offers attractive yields and prospective currency returns. And inflation-linked bonds have repriced more attractively. Low inflation expectations make them a cheap form of insurance, with positive real yields now available.

6. Short-Dated Bonds

7. Government Bonds

In the current environment, both developed-world government bonds and corporate bonds look attractive, but the “spread” between them is tight. Morningstar analysts say this is best seen in credit spreads, which would usually increase if economic vulnerabilities rise. But they haven’t budged, so corporate bonds lose relative appeal given the risk of economic deterioration. For this reason, analysts favor government bonds — particularly U.S. Treasurys — on a risk-adjusted basis. They do see appeal in short-term corporate bonds, which can achieve positive real yields.

8. Currency Management

The U.S. dollar looks expensive, so Morningstar analysts think prudent international currency positioning (and possibly hedging) is an attractive dimension of portfolio management. They think of currency positioning through the lens of portfolio robustness, focusing on currencies with defensive characteristics where it makes sense, but also as a potential source of upside at extremes. Looking ahead, they see merit in currencies outside the greenback. The yen could provide both diversification and potentially help preserve capital in times of extreme economic and market stress and potential upside.