- In December, central banks all but confirmed that the rising interest rate cycle was over. Markets had already spent most of November pricing that in anyway, but who was leading who is a moot point. Either way, the ending of interest rate rises and the anticipation of rate cuts should prove a helpful backdrop for asset classes. The question mark now is how far and how fast interest rate cuts will come into play. The faster the rate cuts come, the more concerned markets are likely to be, as it points to a worse economic backdrop than feared.
- Rates can be cut because the trend of disinflation continues. US inflation peaked all the way back in June 2022, whereas in Europe and the UK it was October of the same year. In the UK, the quarterly setting of gas and electricity prices will throw a fly in the ointment as the pre-announced price increase kicked in on 1 January. In the US, the data feeding into the housing component of inflation looks adrift from the reality of live rental data. In China, CPI has fallen into negative territory and by the end of this year other central banks are likely to be worrying about the risks of too little inflation, not too much. The inflation dog days are over.
- Assessing the health of the consumer remains key to understanding the health of the overall economy. There are some concerns. US households continue to spend and recent revisions to data suggest a still healthy $4 trillion is accumulated in US deposit accounts. However, US real disposable incomes are flat, high interest costs weigh on the housing sector, and student loan repayments restarted in October. In the UK, endless headlines about the cost of living crisis have helped dampen consumer enthusiasm for spending and the threat of rising mortgage costs will slowly begin to impact the spending power in a rising number of households.
- The jobs market still looks well-behaved. The number of job vacancies are falling but unemployment rates remain low, a sign that companies are reducing recruitment, rather than laying-off workers. A job-filled recession is likely to be a less fearful beast than recent recessions. Sadly, geopolitical risks remain, most obviously with the rise in violence in Israel and Gaza, as well as Ukraine.
- Fixed income markets rallied strongly at the end of the year in anticipation of interest rate cuts during 2024. Fixed income is looking attractively positioned – a decent starting yield with the potential for capital gains if/when rate cuts arrive. We are looking for 2024 to deliver solid returns from the asset class. We continue to use a selection of investment grade corporate and strategic bond funds and in most portfolios added to government bonds early last quarter.
- Equity markets are more sensitive to an economic slowdown. We have had two years of very narrow equity markets; energy in 2022 and mega-cap US tech in 2023 delivering an oversized amount of the total return from equity markets. Areas such as mega-cap US equities now look on a rich premium. The UK and Japan are looking cheap versus history but require a catalyst to unlock that value, so too smaller companies, which we feel offer an opportunity for higher risk/reward investors.
- Rising markets in the last few weeks of 2023 may have taken some of the wind from the sails for the start of this year, but the difficult market conditions over the last few years have laid the groundwork for the years ahead. Value has emerged in fixed income and across many equity markets. The foundations of future performance are being laid for long-term investors and having the patience to allow this value to emerge, while picking up interest and dividends in the interim, remains the order of the day.
- Sterling strengthened against all major currencies in 2023, particularly against the Japanese yen. Brent Crude finished the year below $80/barrel and gold finished just over $2,000/oz.
- January 4, 2024
- 1:47 pm
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