Investment Update – January 2024
Global equities returned a further +5% in December, following impressive gains of +9% in November. The catalyst for December’s rise was lower-than-expected inflation data and the Fed’s meeting in the US, where Chairman Powell crushed any remaining expectations for interest rate hikes in 2024 and opened the door to rate cuts in 2024.
The European Central Bank left rates unchanged, and whilst Christine Lagarde suggested it was not time for the ECB to lower its guard, the market clearly believes the peak has been reached. The Bank of England also left rates unchanged, with the economy stagnating and inflation continuing to decelerate. The market believes rate cuts will come from both central banks sometime in 2024, fuelling a rally in risk assets.
Global Bonds benefited from the prospect of interest rate cuts next year, with gilts leading the gains and returning more than 5%. In terms of equity sectors, construction and real estate saw the largest gains, and energy the smallest – but all sectors saw positive returns on the month. Cyclicals outperformed defensives, and value outperformed growth, with UK and European equities leading the way.
On the real assets front, gold rallied slightly, whilst oil prices fell a further 5% to finish the year down 11%. Industrial metals and infrastructure rose 4%, listed real estate rose 9%, and agricultural prices fell 3%.
The outlook improved materially in December, with financial conditions easing in response to much lower inflation and the likelihood of interest rate cuts in 2024. We expect this to support economic activity near term and provide some much-needed respite for interest rate sensitive sectors. This is an environment in which we expect small and mid-cap stocks to perform relatively better against large caps after a long period of underperformance.
The Fed abandoned its higher-for-longer policy at the December meeting and markets have quickly priced in a large number of cuts from the Fed, ECB and BOE. Markets are betting that the Fed has secured a soft landing and with inflation falling sharply without a significant rise in unemployment, we have sympathy with this observation. However, this is now a consensus view and we should remember that the full impact of previous hikes is still to bite, and there is a little further to go on inflation. However, we feel recession is now less of a risk than 12 months ago. That said, if the Fed follows through with the market implied rate cuts, such a dramatic easing of financial conditions could prompt a resurgence in inflation in the second half of the year. Quelling a second wave of inflation would necessitate even tighter policy than is currently in place, putting recession risk back on the table.
The UK’s outlook is improving as energy prices have tumbled in recent months, and inflation is falling faster than the Bank of England’s most recent forecasts. However, wage growth remains too high for the bank to cuts rates as aggressively as markets have now priced in. Rate cuts beginning in the summer seem likely to us. The situation in the Eurozone looks clearer, with the economy in recession and inflation falling rapidly. We expect the ECB to cut rates as early as spring.
This document is issued by Skerrits, which is a trading style of Skerritt Consultants Limited. Skerritts makes no warranties or representations regarding the accuracy or completeness of the information contained herein. We have prepared the following document based on our view of the current market. Nothing in this document shall be deemed to constitute financial or investment advice in any way. We recommend you speak to your adviser before making any decisions. This document shall not constitute an invitation or inducement to any person to engage in investment activity. Past performance is not a guide to future returns and the value of capital invested and any income generated from may fluctuate in value. Skerritts is a trading name of Skerritt Consultants Limited who are authorised and regulated by the Financial Conduct Authority. FCA Number 163291. Skerritt Consultants Limited is registered in England and Wales, registered number 04129116. Registered Office: Skerritt House, 23 Coleridge Street, Hove, BN3 5AB. VAT Registration: GB 161 0039 56
Head of Investment, Skerritts
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Categories: Investment update
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