Scott Kingsley, Senior Wealth Advisor
Over the last few years, one thing has been evident: financial markets quickly adapt to changing environments, some of which have been dramatic. As we move into 2024, when looking at your investments, it is essential to consider the broader situation, and then we can start to dig down into the individual sectors.
Even though inflation is starting to fall, with interest rates expected to follow suit, the short-term prospects for individual economies are varied, to say the least. The latest forecasts from the IMF certainly make for interesting reading:-
| Country/Area | GDP growth 2022 (A) | GDP growth 2023 (F) | GDP growth 2024 (F) |
| United States | 2.1% | 2.1% | 1.5% |
| China | 3.0% | 5.0% | 4.2% |
| United Kingdom | 4.1% | 0.5% | 0.6% |
| Euro Area | 3.3% | 0.7% | 1.2% |
| Emerging & Developing Asia | 4.1% | 4.0% | 4.0% |
| Advanced Economies | 2.6% | 1.5% | 1.4% |
| Global Output | 3.5% | 3.0% | 2.9% |
Despite the doom and gloom of recent months and challenging forecasts regarding inflation and interest rates, it appears that the above economies will avoid a recession. Even though there may be lingering doubts regarding the US, the UK, and the Euro Area, previously more pessimistic forecasts have been shown to be well wide of the mark.
While interest rates will likely remain "relatively high" across the US, Europe and the UK, many experts are forecasting reductions in the first half of 2024. We will likely see continued falls during 2024 and beyond, depending on how economies react to interest rate changes. This will reduce borrowing costs, encourage consumer spending and, eventually, increase company profits.
The main reason why expectations of interest rate reductions have been moved forward is due to inflation. We only need to look towards the UK, which experienced double-digit inflation just a few months ago, to see the significant fall to 3.9% in November. Even the most optimistic analysts were caught off-guard a little, although there are still potential inflationary pressures in the system.
Even though interest rates and inflation in the Far East have not risen to the extent seen in the US and Europe, there has been a knock-on effect on global trade. Consequently, if interest rates fell, this would be encouraging for the Far East and the flow of international trade. They used to say that the UK catches a cold when the US sneezes. Even though the Far East is less dependent on the US than in previous years, changes and expectations for the US economy still have an impact.
One interesting point many economists and analysts picked up is the broader consequences of the US presidential election and, to a lesser extent, the likely general election in the UK. President Biden has courted controversy with his views on the Middle East, but ahead of an election later this year, he is expected to soften his support for Israel and seek a ceasefire. Even though the US has significant influence over Israel, time will tell as to whether these two countries are still aligned.
The situation in the UK is slightly different, but as we saw in the Autumn Statement, we are likely to see further, albeit relatively modest, tax giveaways as we approach the general election. While the election date could drag on until 2025, experts predict movement in the first half of 2024. In all likelihood, there will be a change in government in the UK, whether a majority or two parties working side-by-side, but the statistics show a potential switch to a Labour-led government does not carry the same degree of risk today that it did 50 years ago.
Before we consider the outlook and prospects for different sectors, it's interesting to look back and see how markets performed during 2023.
| World Indices | Performance 2023 |
| FTSE 100 | +4% |
| S&P 500 | +24% |
| Dow Jones Industrial Average | +13% |
| NASDAQ Composite | +43% |
| Nikkei 225 | +27% |
| Hang Seng Index | -14% |
| MSCI World Index | +21% |
As you can see from the figures above, the FTSE 100 and the Hang Seng index underperformed compared to other leading indices and the MSCI World index. While many believe that the FTSE 100 is significantly undervalued compared to the likes of the S&P 500 and Dow Jones Industrial Average, this has been a common theme for some time. Prompting the question, what needs to happen to bring the forward P/E ratio of the FTSE 100 back in line with its global counterparts?
On a global basis, there are three main issues to consider about your sector choices in the short to medium term:-
Currently, the Bank of England, Federal Reserve and the ECB are reluctant to confirm that interest rates will likely fall in 2024, even though this is the general consensus among analysts. While it may be unclear how political uncertainty, and economic forecasts, will impact different sectors, these should be seen as wider market risks.
If interest rates do start to downturn and inflation returns to "more traditional levels", this will positively impact economies and stock markets worldwide. To what extent and where this may be more focused remains to be seen. Some of the expected beneficiaries in this environment include:-
The technology sector has attracted much attention in recent years, with massive growth in AI investments expected to lead to significant performance enhancements and cost savings across the broader global economy. As you can see by the performance of the NASDAQ over 2023, many investors are increasing their exposure already. If interest rates do fall in 2024, this will increase the focus on growth sectors such as technology, with some investors likely to switch from more defensive areas.
As a consequence of a relatively weak outlook for the UK economy in the short and medium term, property prices in the UK are expected to fall during 2024. While estimates range from single to double digits, any reduction in interest rates will reduce some of the financial pressure caused by recent mortgage rate rises. How long this will take to filter through to trading and profitability for housebuilders remains to be seen. However, amidst short-term concerns, value may emerge for those investing on a long-term timescale.
Under normal conditions, a reduction in interest rates and inflation would encourage more robust consumer spending. Unfortunately, relative spending power is under massive pressure due to relatively high interest rates and, in some cases, double-digit inflation. For example, using official data in the UK, consumer spending power last seen in 2021 will not be achieved in relative terms until around 2027.
However, there is a limit to how far you can reduce the purchase of necessities, which will, to a certain extent, support discount retailers and the consumer staple sector. This is an area where introducing new technology, including AI, could significantly impact efficiency and profit margins.
While interest rates are unlikely to fall dramatically in 2024, any reduction would broadly benefit the wider bond market due to the inverse relationship between bond prices and interest rates. For those interested in the future direction of global interest rates, these tend to be identified by money markets before central banks make official announcements. While this is a relatively defensive sector, it is a handy indicator for the direction of future interest rates.
The performance of the NASDAQ in 2023 would suggest that some investors are already switching from more defensive stocks to those offering a higher-than-average degree of growth (and risk). Whether the switch will be as marked as it has been in the past remains to be seen because there are still numerous economic and political challenges ahead.
The banking sector is an interesting quandary, now making significant use of AI and cutting-edge technology, but also likely to see margins under pressure if interest rates do fall. While there will be a time lag, we are also likely to see an increase (to what extent is uncertain) in mortgage defaults and repossessions. Historically seen as a defensive sector, we may see an element of switching to more growth-orientated investments.
While many homes and businesses continue to struggle with considerable increases in energy costs in recent years, the utility sector will remain a political hot potato. As profits increase, regulatory pressure follows suit with calls for one-off taxes and restrictions on price rises. Traditionally seen as a defensive sector, there's much more to consider in the current environment, with regulators balancing affordability with long-term infrastructure investment and acceptable returns for utility companies. No easy task!
As we mentioned in last year’s review, the FinTech sector still offers significant potential for long-term growth, even with recent funding challenges as interest rates increased. We also have the emergence of a regulatory structure for cryptocurrencies, with some analysts predicting that Bitcoin could hit an intra-year high of around $100,000 in 2024. The likely introduction of a spot price Bitcoin ETF (in the US) will provide private investors with easier access to the crypto asset sector, which many believe will become a more recognised asset class in 2024 and beyond.
Even though these two sectors, in particular, have been identified by many analysts as having significant potential for long-term growth, the higher the potential rewards, the higher the potential risks. Consequently, it is vital to tread carefully and ensure that any investment correlates with your attitude to risk and reward.
After our review of stock markets and sectors, economics and politics, the importance of diversification is even more critical in the current environment. While any investment should be considered on a long-term basis, I am acutely aware of short-term fluctuations which can cause concerns among some clients. Considering the need for diversification and individual attitudes to risk and returns, it is important to review your investments regularly.
As tempting as it may be to switch from cash and defensive stocks to more growth-orientated investments, it's essential to recognise the fragile nature of individual economies and the global outlook. If there is one thing the last few years have taught us, it is to expect the unexpected, and diversity in your investments will help you to sleep better at night.
As an experienced investment adviser, I have encountered the ups and downs of the investment world and lived through challenging and rewarding times, which allows me to retain a degree of composure/balance. It's important to look at investments from a short, medium and long-term perspective and then create a long-term investment strategy reflecting your particular requirements.
Even though an expected reduction in global interest rates and inflation will benefit economies and stock markets, there is a lot more to consider. Economic growth forecasts for many leading economies are subdued, to say the least, with the UK expected to underperform compared to its peers. So, while there may be a temptation to switch wholesale from defensive to more growth-orientated sectors, it is crucial that you continue to maintain a balanced approach.
Contact Scott Kingsley today if you want to discuss your investments and broader finances. It costs nothing to have a conversation, and it could be one that changes your life. Follow this link for a free investment review.