2023 proved a challenging year for investment markets, albeit the last quarter of the year ended on a more optimistic note. With both inflation and interest rates looking set to stabilise through 2024, Charlie Buxton, our Head of Investment Management, and Ian Hooper, Chief Investment Officer at Progeny provide the latest insights.
Volatile markets became something of the norm in 2022 and 2023, but hopes for 2024 are higher, especially given the expectations that inflation will fall towards central bank’s 2% target and interest rates will be cut. So, what should we expect from the next 12 months? As The Fry Group becomes part of Progeny, a key area of integration will be our investment offering. As a result, Progeny’s latest market update provides a useful insight into how we expect 2024 to play out.
The global backdrop
It’s clear that the US remains the driving force of the global economy. With the consumer price index in the US falling and inflation in Europe and the UK equally trending downwards, it’s likely that interest rates may have peaked, and cuts could come as soon as the spring – albeit we would caution about the potential for resurgent inflation.
Conflict in the Middle East may create some challenge when it comes to inflation though. And with half the world’s population heading to the polls, 2024 will be the biggest election year in history, so geo-political uncertainty remains.
When it comes to growth, UK forecasts are sluggish at 0.7% for GDP, but UK equity valuations remain attractive. Across Europe forecasts are weak too, with an overall prediction of 0.6% for GDP.
Although the Dollar was expected to weaken, this didn’t play out until the last quarter, as markets began to predict rate cuts from March 2024. Sterling then strengthened as investors anticipated a divergence in central bank policy between the Federal Reserve and the Bank of England. During 2024 it’s probable that rates in the UK will stay ‘higher for longer’ owing to more embedded inflation.
Areas of growth
When it comes to areas of interest over the coming months it’s helpful to note which areas and sectors finished in the best shape in 2023.
- US equities enjoyed a strong final quarter and the technology sector performed well too – boosted by a focus on artificial intelligence and companies at the forefront of this.
- UK equities have risen, although there was a marked difference between larger companies and mid-sized firms, which overall delivered stronger returns. Against a global backdrop, the UK did underperform, mainly due to lower commodity prices and a drop in earnings in key sectors such as energy and healthcare.
- On a European level, inflation fell to 2.4%, its slowest annual pace since July 2021, and with rate cuts expected there could be good opportunity here, especially given Spain’s economy and stock market which performed particularly well.
- Japanese equities finished a strong year and incentives for listed companies to boost valuations and earnings had a positive effect. The country’s increased focus on corporate governance and shareholder-friendly policies now offers further optimism too.
- UK gilts also benefitted from an uplift in prices and talk of a recession in the UK, with consumers feeling the brunt of higher interest rates more than in the US.
Investment themes for 2024
Looking ahead the key themes for 2024 can really be summarised as the ‘3Bs’:
- Bonds – after some ups and downs, bonds should act like bonds again this year with suitable yield returns. If there is a harder landing on recession than expected, bonds may even offer a capital return too.
- Broadening returns – 2023 delivered a relatively narrow set of stocks that provided a return. In 2024 growth asset returns are likely to be spread over wider regional markets. Mid and small cap valuations are looking particularly attractive.
- Balance is key – there are still uncertainties over how the economic and geo-political climates will cope so, as always, maintaining a balanced portfolio of different asset classes is crucial.
If there’s a lesson from the last couple of years, it’s to expect the unexpected and to keep diversification at the forefront of investment portfolios. The same appears true through 2024.
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