3rd January 2024
Global Outlook
The Federal Reserve triggered a stock market rally last month as it signalled interest rate cuts in 2024. The Chair, Jay Powell, stated that there had been “real progress” on the fight on inflation and that he did not want to restrict the economy longer than necessary. This news boosted global stock markets and saw yields on global bonds fall which allowed investor portfolios to end 2023 on a high.
Last year, we saw central banks lift interest rates to their highest levels since 2008. This was necessary to combat inflation and fortunately we have seen that there has been a sharp inflationary trajectory downwards which has highlighted that the tightening of monetary policy has succeeded. Central banks are attempting to win the war against inflation without pushing economies into a deep recession. So far, this has worked and there has not been any significant economic disruption. The question remains whether a recession can be avoided but at present central banks are still walking on a narrow tightrope and all decisions are still very data dependent.
Many economists are predicting a moderate economic contraction in mid-2024 with a return to growth in late 2024 or early 2025. Inflation will eventually return to the central bank’s target and this will allow central banks to pivot and cut rates. This scenario will still provide opportunities for investors because despite an economic contraction the stock market will be looking forward to the expected growth in late 2024 and 2025. Interest rate cuts will also provide lower borrowing costs and more discretionary spending which should be positive for growth.
2024, will also be a year of politics with a US Presidential election in November and a UK election most likely to take place by the summer. It is still early to call but the US election looks likely to be a closely fought affair. At present, Donald Trump is favourite to be elected President but there is still lots of campaigning to take place. Interestingly, since 1951, when looking at US presidential election years, there have only been three negative stock market years, with the rest being positive. Investors are hopeful that with inflation coming down and a new US president being elected, 2024 should be a good year for stock markets. This will be an important election for stock markets and the global economy, and we will be keeping a close eye on proceedings.
Back in the UK, the Labour party have a lead of 15 points or more in most polls. Polling can be unreliable, and we experienced this in the Brexit vote. However, it does seem the current momentum is backing a change of government and this does seem the most likely outcome. Whilst this election will be less important for global stock markets, it is important for domestic investors who are invested primarily in sterling. Fortunately, the most probable outcomes of the election are unlikely to cause major currency fluctuations or stock market shifts. However, we still need to wait to see what is published in manifestos and this could change market sentiment.
A&J Outlook
2023 continued the recovery in risk assets following what appeared to be the peak of inflationary pressure in global economies and also the peak of interest rates with a now likely downward trajectory. Value equities offered more protection against downside threats compared with their growth peers, as they tended to benefit most from strong recoveries after recession and trade on lower earnings multiples.
We still like selective growth stocks where there remains true innovation and potential for change, especially recent trends in consumer behaviour that were accelerated by the pandemic but prefer value equities on the whole. We also continue to hold our overall equity weighting at neutral. Fixed income has started looking more attractive with yields now at levels not seen in well over a decade. Bonds also remain an important diversifier in our portfolios. With inflation having seemingly peaked, we believe interest rates could begin to head lower as fears of a global recession pick up.
Duration has become appealing again as market participants shift their primary concern away from inflation and towards growth fears. We also hold an allocation to cash to offset some of this fixed income risk and dampen portfolio volatility. We have also been adding ‘alternative’ assets to the portfolios, which offer low-to-negative correlations to traditional asset classes (stocks and bonds) and give the potential to protect during times of significant market volatility, such as we are seeing at present.
UK
The UK market is very value-tilted and despite positive relative performance it is still highly attractive on a valuation-basis. The UK economy has also recovered well from the pandemic, though economic growth is faltering. The main driver of UK equity outperformance will be relative valuations.
Europe
There is good value to be found in European equities and the region is attractive given historic valuation differentials to the US, and financial companies stand to benefit with interest rates on the rise.
United States
The US represents poorer value relative to the rest of the world due to the high proportion of tech companies that still command a multiple far in excess of the broader market, however it also has the best long-term earnings growth and some of the most outstanding quality companies, as well as the most innovative. In times of global stress, the US also tends to act as a safe haven investment, which props up markets. We have increased our US exposure as we do believe the US will remain an attractive investment option in the long-term, but with some obvious headwinds making us more cautious for now.
Japan
Japan defied all expectations in 2023 and was the real standout relative performer. In the future, Japan is anticipated to face heightened exposure to cost-push inflation characterised by volatility. This is attributed to escalating geopolitical risks, the impact of climate change, and elevated wages resulting from labour shortages stemming from the country’s diminishing working-age population. Thus, we expect poor relative equity performance from Japan. In the short-term, attractive valuations in the region may boost markets, but this will likely be short-lived.
Asia Pacific & Emerging Markets
Asia Pacific and Emerging Markets (EM) are predicted to see exceptionally strong GDP growth over the next several years and thus we are comfortable maintaining an overweight position. We currently like frontier markets as a more attractive investment option within the EM universe. Typically, markets move in cycles and EM vs US performance is no different. We have been in an extended period of US equity outperformance, and we now expect this trend to change in favour of EM stocks. Emerging markets are projected to experience a challenging beginning to the year due to factors such as elevated interest rates, geopolitical changes, and the persistent strength of the US dollar. Nevertheless, as the growth trajectories of emerging markets and developed markets diverge, along with a growing demand for diversification away from the U.S. and relatively low investor positioning, EM is expected to become increasingly attractive by the year 2024.
Disclaimer:
The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 2nd January 2024, and are subject to change.
The content of this publication is for information purposes and should not be treated as a forecast, research, or advice to buy or sell any particular investment or to adopt any investment strategy. It does not provide personal advice based on an assessment of your own circumstances. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice.
Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.
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