It’s pleasing to report that at the start of 2024, I can write about investment matters in a more positive tone.

A sea change in investor sentiment occurred around the start of November last year. This improvement came as the debate in the US changed from “Have interest rates peaked?” to “When will interest rates start to fall?”. Then, in December, the US FED announced superb inflation numbers (the rate fell sharply to 3.1%) and openly discussed the timing of interest rate reductions.

Bond markets surged and equity markets joined the party. A similar debate took place in the UK, but our inflation number is still higher, at 3.9%, and thus the reaction was more muted.

The Global Equity Index increased over the quarter by +10%, ending the year with a decent gain of +12.3%. Here in the UK, the FT All-Share Index rose by +4.8% over the quarter and enjoyed gains of +8% over the year.

The US market, which has proved more resilient this year, grew by a very strong +13% over the final quarter, topping off a return of +24% over the year. European markets grew by +10.2% over the quarter, growing by +15.2% over the year. Asian markets collectively were the poorest performing over both the quarter and the year, reflecting a difficult set of economic fundamentals, primarily in China, falling -0.1% over the quarter and -0.6% over the year.

Investment returns for most client portfolios were muted during the first nine months of the year but have now improved. The main reason for this is that the fixed-income securities we hold to reduce investment risk had a mediocre 2023 and were flatlining until November when they enjoyed a surge in value.

We start the new year with a note of caution. The Israel-Hamas war has just resulted in the price of oil spiking and the US markets are pumped up with hype surrounding AI. However, the economic backdrop has improved significantly and thus the general outlook for investment is looking more positive.

Here is a chart of global markets over one year:

ONE YEAR GAIN; +12.3%

Source Google Finance

…and over 5 years.

FIVE YEAR GAIN; +21.4%

Source; Google Finance

MARKET PERFORMANCE

I enclose tables showing the performance of the main indices over various time periods to the end of the year. The performance of your portfolio will reflect your risk grade and portfolio style.

Short-term performance

Long term performance

Outlook for 2024

The market mood music has improved significantly over the previous three months, and we enter 2024 with a much better economic backdrop. I feel more optimistic than I have for a couple of years. The tonic of lower interest rates will arrive sometime in 2024, boosting economic growth and investment. The value of all long-term investments is priced off bond yields, and these have fallen considerably since improved inflation numbers were announced in November and December.

Lower interest rates, when they come, put cash into the hands of consumers via lower debt and mortgage repayments and make financing investment plans by business and industry less costly.

Lower inflation leads to lower interest rates

Source: FT

The big issue for 2024 is whether the central banks have tamed inflation without crashing their economies. In the US, remarkably, this appears to have happened. So much so that it could be that interest rate cuts are deferred as the US economy (and particularly their job market) is relatively strong. However, ongoing economic growth is supportive of market strength even if rates are not cut.

Another concern is China, which historically has been an engine of growth for the world. The Chinese government are grappling with an awful property market which could crash, taking the economy with it.

It’s certainly possible that equities will have a decent 2024. Falling interest rates are normally good for shares, as long as they are not accompanied by a very deep recession – and this seems to have been avoided. If China’s growth rate falls, commodity prices will weaken and that should help with the battle to reduce prices elsewhere.

The prospects for the government bond markets are good. Once central banks cut interest rates, then government bonds should do well, although some cuts are already “priced in” to valuations today.

As ever there are always geopolitical threats to consider. Will the war in the West Bank escalate? Could Putin be emboldened by withering support for Ukraine by the US government? Then there is the perennial threat of China striking against Taiwan.

Other risks to consider include: has the US market got ahead of itself and are the “Magnificent Seven” tech stocks overvalued? Will Donald Trump be re-elected? Closer to home could there be a change of government and what impact will higher taxes (which are already climbing here) have on our economy? As ever, there’s plenty to debate.

All these concerns pretty much always exist in the world of investment. Global events usually derail markets for a while, although in recent times the markets have been quick to recover. However, we are fundamentally in a much better place than we were a year ago and this has to be a major positive.

Best wishes for the new year,

Jim

Jim Aitkenhead BA(Hons)Econ FCII APFS ASCI

Chartered Financial Planner