As we reflect on the trials and tribulations of 2023, it’s essential to acknowledge the hurdles faced by investors – from escalating geopolitical tensions to the ever-present threat of recession. However, amid the uncertainty, there are compelling reasons to approach 2024 with some optimism.
Let’s address the concerns first. Geopolitical tensions, whether in Ukraine, the Middle East, or Asia, have cast shadows across the global landscape. Central banks grappled with rising inflation, prompting them to implement higher interest rates. The spectre of a recession loomed, challenging markets worldwide.
Despite these storm clouds, 2023 has delivered some unexpected positive outcomes. Equities defied expectations, surprising on the upside, while fixed income assets rebounded after a challenging 2022. Most economies, except for Germany and Italy, exhibited healthy growth, with the United States leading the way. And while growth is expected to be somewhat subdued this year, the overall economic picture is encouraging.
A notable shift in focus from fighting inflation to encouraging growth by central banks is anticipated to define market performance in 2024. The delicate balance between growth, inflation, and interest rates will be key.
The battle against inflation remains a priority for central banks, but recent data brings positive news. In October, year-on-year inflation in the US and the UK came in at 3.2% and 4.6%, respectively, exceeding market expectations. Eurozone inflation also declined to 2.4% in November. These figures hint that the era of interest rate hikes may be coming to an end, as central banks opted to leave rates steady in November.
The tug-of-war between inflation and interest rates impacted fixed income markets in 2023, with yields rising sharply. However, recent positive inflation data has led to a fall in bond yields from their peaks. This, coupled with the avoidance of significant losses witnessed in 2022, suggests that much of the valuation readjustment has already occurred.
Indeed, the UK’s biggest mortgage lender, the Halifax, has cut some interest rates at the beginning of January 2024 by close to one percentage point, with brokers now expecting others lenders to follow suit; implying that interest rate expectations are very much now on the downside.
Stock markets navigated the challenges posed by inflation and interest rates, along with geopolitical tensions. Despite periods of volatility, most markets posted reasonable gains in 2023. The divergence between the largest and smaller companies was evident, with investors favouring tech giants like Tesla, Nvidia, Amazon, and others.
The UK market faced its share of challenges, lagging behind global peers. While larger companies provided support, medium and smaller-sized constituents remained unpopular among investors. Nevertheless, the UK market appears comparatively cheaper using conventional valuation measures, potentially offering a unique opportunity for savvy investors.
China, once expected to experience a post-Covid economic boom, faced disappointments and concerns over its property market. This impacted investor sentiment not only in China but also across Asian and emerging markets. Despite this, Japan emerged as a strong performer during the year.
Looking ahead to 2024, strategists express confidence in the continued rally in equity markets, albeit with sensitivity to unfolding news. The return of value to bond markets, coupled with current yields, suggests the potential for decent returns, even without significant interest rate cuts.
Having bid farewell to 2023, the overarching sentiment is one of cautious optimism. While challenges persist, the resilience of markets and positive indicators provide reasons to be cheerful about what lies ahead in 2024.