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2023 was a year where the actions of Central Banks to bring inflation under control was the major talking point impacting market sentiment and direction. This forthcoming year offers the potential for markets to make headway, with a tailwind of lower inflation and gradually reducing interest rates supporting risk assets.
In terms of inflation, we are certainly not out of the woods yet, as can be seen from the surprise uptick in the measurement of inflation in the Eurozone at the end of 2023. It is entirely possible that we could see inflation rise at points in the next few months but there appears to be a consensus that overall, there will be a gradual reduction towards Central Banker target inflation rates over the course of 2024.
Economies and Stock markets operate in different timelines and whilst global growth will probably continue to be subdued this year equities and bonds could offer worthwhile opportunities to generate real growth. A backdrop of reducing interest rates assists both these asset classes and with bond yields at relative highs this could be a year where growth opportunities become particularly interesting. The type of Bonds held will determine the range of returns achievable in this sector so careful selection will be essential to offer the best opportunity for capital growth.
Similarly with Equities, not all markets are equally priced at this juncture. Slow economic growth plus higher than normal inflation is a challenging backdrop but with company valuations being below average in many global markets, there is scope to see valuations improve as interest rates start to reduce and margins strengthen.
US Indices are valued towards the top end of their historical range and therefore do not look quite as attractive as other markets. Much of the outperformance achieved in US markets in 2023 stemmed from the ‘Magnificent 7’ large technology companies that generated the lions share of returns last year.` We also have the Presidential Election on the 5th November 2024. Subject to legal challenges, Donald Trump will be facing Joe Biden in the race for the Presidency. This has the capacity to be an even more rancorous campaign than last time around. This will have an impact on market sentiment based on the planned agendas of the candidates and will have to be monitored carefully.
After a sluggish 2023, when China failed to return to growth in the manner promised by President Xi, 2024 may be the year when the Chinese Government uses monetary and fiscal policies to support the economy more robustly to assist growth. The outlook for the Chinese economy does look more positive this year if the necessary support is forthcoming.
If China does well in 2024 then expect Emerging Markets to benefit from that uptick. These economies are in a better position than many developed economies as they raised interest rates earlier and therefore have better scope to bring interest rates down earlier than in the developed economies. Lower borrowing costs in Dollar terms also tends to help these markets.
The expected continuation of corporate reform in Japan makes this an interesting sector for investment. A strategy to increase dividend growth, unlocking capital from non-performing assets and merger and acquisition activity should help to underpin the progress seen in 2023. Political change is due in Japan this year and a new Prime Minister will hopefully bring new momentum to the financial reform taking place there.
The UK also has an election looming in Autumn of this year and the likelihood of a first Labour Government since 2010 looks ever more possible as the Conservatives struggle in the Polls. The plans Labour have for the economy will be watched carefully to see what impact they will have for investors. UK markets have languished relative to other developed markets, so valuations are particularly low which does offer some very interesting investment opportunities.
Summary
An interesting year awaits us. A year of significant elections, a year when Central Banks will have to juggle the strategy of keeping interest rates high to ensure inflation is under control against the need to reduce interest rates to avoid tipping the global economy into recession. The way in which we manage client’s money is by taking an all-round view on asset classes, using multi-asset investment funds that are actively managed to help navigate the choppy waters we will face at times in the year ahead. By doing this we aim to harness the expertise of fund managers that have tested track records of trading through different investment conditions. We will overlay that expertise by continuing to offer holistic advice on tax planning, investment alterations and specific advice to meet clients changing needs.
Geopolitical issues will continue to have an impact but to a lesser extent than they did when they initially came to the fore.
Overall, however we feel that 2024 offers interesting investment opportunities and some of the bigger fiscal challenges we have had to face over the last 12-18 months are finally subsiding. |
