Overview
2023 has been a year of turbulent markets, rising interest rates, an ongoing cost-of-living crisis, and increasing geopolitical risks. It has been a year that saw cash once again become an asset that had great appeal to many as the turbulence buffeted many asset classes.
“From an investment point of view, it could be argued that 2023 has been something of a damp squib. No pivotal change in central bank action, which has seen rate hikes continue remorselessly for most of the year. There has been no real change in bond market behaviour either, where yields have ground higher, although there have been signs of this turning as we come to the end of the year. Developed market equities have generally made reasonable gains but China and emerging markets have struggled” stated the Chief Investment Officer at RLAM. That would seem a fair assessment although its worth remembering that seven companies in the USA contributed hugely to the performance there. It is also worth noting that some global themes have distorted sector returns. For instance, funds dedicated to Artificial Intelligence (AI) have performed extremely strongly and 2023 saw the world wake up to the possibilities (and dangers) of AI. In 2022 it was commodities and energy that led the way, but not so in 2023. However, AI looks as though it is increasingly going to play an important role in our lives.
As many readers of Investment View will know, we don’t make forecasts as we continue to watch in amazement that so many remain determined to peer into the future with great conviction, only to be found wanting time after time. This time last year, many commentators saw recessions for 2023 as inevitable on the back of swingeing rate hikes and extremely high energy prices. And yet, as is so often the case, things didn’t turn out the way they were meant to. The previous year had seen the most dramatic tightening in monetary policy in generations after inflation turned out not to be as ‘transitory’ as central banks had hoped. The gas price chart provides some cheer that the massive peaks of 2022 are hopefully now well behind us, and utility bills won’t feel like another mortgage.
Our View
There are perhaps some key levers that will impact markets in 2024 and beyond. A major feature of 2024 will be interest rates and the direction in which they head. There have been varying comments from the Central Banks which at times are at odds with what markets are expecting, albeit the Federal Reserve has recently intimated that rates may be at their peak. U.S. central bank chief Jerome Powell said the historic tightening of monetary policy is likely over as inflation falls faster than expected and with a discussion of cuts in borrowing costs coming “into view”. The market responded extremely positively on the back of that statement and is it being much too optimistic to believe that this might be the start of a positive sentiment building momentum? The shift in outlook was stark, with 17 of 19 Fed policymakers seeing rates lower by the end of 2024, and none seeing them higher.
The EU central bank has also held rates, but commentators suggest inflation is falling which should then see rates following. However, The Bank of England is insistent that rates will not be reducing in 2024, and the CBI went further to suggest no rate cuts will happen before 2026. The Bank of England has not got the greatest record in forecasting. During the year, the FT reported “The Bank of England could tear up its current process for producing forecasts and move to an approach closer to that of the US Federal Reserve under a review led by Ben Bernanke”. Hopefully, their forecasting might be off the mark this time too.
Inflation will also play a major role in 2024 in allowing rates to reduce or not. The US and Europe seem to be managing inflation better than the UK, but a commentator recently said that getting inflation from over 10% to 4-5% is the easy bit. Getting it from 4-5% to 2% is much harder. That will be the challenge for the major developed economies. Perhaps, the UK hill is steeper and will take longer to conquer.
Professor Paul Samuelson’s famous quip, “the stock market has predicted nine out of the last five recessions” which he said in 1982. The conversation in 2024 will be whether a recession is unavoidable or whether a “soft landing” can be achieved. A soft landing, in economics, is a cyclical slowdown in economic growth that avoids recession. A soft landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a severe downturn. Soft landing may also refer to a gradual, relatively painless slowdown in a particular industry or economic sector. Many believe a recession is inevitable in 2024.
There are many pieces of the jigsaw, and that’s ignoring geopolitical events, that make forecasting a lottery. It is a different world from just a year or two ago. Portfolios need to be nimble, and increasingly we will use multi asset solutions to provide the flexible foundation of portfolios whilst selecting strong long-term funds to deliver long term, performance away from the deafening noise.
It has been a very difficult and challenging year for all and let us wish for a more settled and positive 2024 for all and for the investment world but also humanity. There is light at the end of the tunnel.
Douglas Kearney C.A. Investment Director
The above article is intended to be a topical commentary and should not be construed as financial advice. Past performance is not an indicator of future returns. Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation.
