With so much uncertainty for investment managers this January, Richard Warne, Senior Portfolio Manager, Copia Capital, has shared not only his reflections on recent market dynamics but also takes a look forward to what might be coming down the line as this year unfolds.
The last 12 months have been marked by persistent challenges. While the first quarter was largely positive for markets, the mid-year picture was more mixed before the closing months saw something of a recovery. Inflation in particular has been an enduring problem, with central banks in the UK, EU and the US struggling to bring it back to target. Their actions dampened bond market returns and created uncertainty and volatility in equity markets.
As for 2024, the question on every investor’s mind is, what should we expect this year?
Macro concerns continue to shape market dynamics
Inflation has been a persistent challenge for the UK, EU, and the US over the last two and a half years. After a relatively benign period for inflation since 2017, the cost of living rose sharply during 2022 and has remained well above central bank targets since.
Inflation finished 2023 much lower than it started the year. However, recent data suggests that it isn’t under complete control just yet. US Consumer Price Inflation (CPI) came in higher than expected in December, reaching 3.4% for the year, driven by higher rent and food prices. Similarly, the latest UK CPI numbers were unexpectedly high, up by 4% in the 12 months to December 2023, with alcohol and tobacco the largest contributors. In the Eurozone too, inflation rose in December to 2.9%, although this increase was largely anticipated following the end of government energy price caps in several European countries.
Market rallies
Equity markets experienced a robust rally towards the end of 2023, propelling most regions into positive territory. The US emerged as the top performer for the year, with big technology companies continuing to drive growth.
Bond markets also witnessed broad-based gains late in Q4, as expectations of rate cuts in 2024 gained traction thanks to falling inflation numbers. Yields on government bonds, including 10-year US Treasuries, UK Gilts, and German Bunds, fell around 100 basis points, reflecting a surge in bond prices. This trend extended across the credit spectrum, with investment-grade, high-yield, and Emerging Market debt all generating positive returns.
In the alternative investment space, real estate and private equity stood out in the fourth quarter, again benefiting from a more favourable interest rate outlook.
Cautious optimism
The market resurgence has prompted speculation about whether this momentum will carry forward into 2024. Certain factors are positive – inflation has fallen significantly from the heightened levels seen last year. The market is now pricing in numerous rate cuts from central banks, which could be a continued positive driver for both bond and equity markets, plus other asset classes such as Real Estate Investment Trusts (REITS), and infrastructure, which have been under pressure over the last 18 months with higher bond yields. There is also talk in the UK about encouraging increased retail and institutional investing in the local equity market. This is not a given, but if it does come to pass could be a fillip for the asset class.
There are still things we need to be mindful of, Inflation may continue to be an issue for Western markets for at least the first half of 2024, plus there are also continued geopolitical risks. The ongoing war in Ukraine has created tensions between Russia and Western economies, and there are concerns that the Israel-Hamas conflict could escalate further and draw in neighbouring countries. We have seen the recent attacks on commercial ships in the Red Sea from Houthis rebels from Yemen, causing many shipping companies to find much longer and costlier routes around Africa rather than run the gauntlet through the Bab al-Mandas strait. The West is also uneasy about China‘s technological advancements and the threat it poses to national security.
Changing political leadership may impact international relations and events across the globe. 2024 has been billed as the biggest election year ever, with national votes due in 40 countries, including the UK, US, Taiwan and the European Parliament.
There are always factors to be worried about, but our proprietary Risk Barometer moved into the Amber zone (-0.31) as at 1 January 2024, signalling the global economic outlook is brighter, relative to the Red zone it had occupied for many months. Our Risk Barometer takes the data from hundreds of market and economic variables, including equity prices, bond yields, and the gold price, to generate an overall investment risk score of between +1.0 and -1.0. It uses a green, amber, red system to indicate the level of risk, with green (risk scores between +1.0 and 0.33) suggesting that global economic signals are more positive than negative, amber (0.32 to -0.32) signalling a balanced outlook, and red (-0.33 to -1.0) pointing to more negative than positive indicators.
The recent market rally has provided relief for investors, and the Risk Barometer moving into the Amber zone gives us room for cautious optimism into 2024. A well-diversified portfolio remains key, but there are interesting long-term investment opportunities across different sectors of the market. We continue to take advantage of opportunities as they arise, focusing on quality dividend-paying businesses with solid earnings and good financial management.
