Investment Update – December 2023

Global equities broke a 3-month losing streak, rising by 9% in November. On a regional basis the US and Europe were the best performing regions, with the UK and emerging markets underperforming. The technology sector rose over 10%, whilst every other sector posted positive returns. Bonds also participated in the equity market rally, with gains led by US and UK government bonds, and high-quality corporate bonds.

Turning to real assets, real estate and property equities registered double digit gains as interest rate pressures eased. Oil fell another 6%, following a sharp decline in October, and prices are now lower than the start of the year, despite the outbreak of another conflict in the Middle East and the ongoing war in Ukraine.

UK inflation fell to 4.6% in October, prompting a positive market reaction from small and mid-cap UK stocks. Gilts and sterling corporate bonds also rallied as investors began anticipating rate cuts in the second half of 2024. Mortgage rates fell in response, and consumer and business confidence surveys ticked higher as it became clearer that the worst of inflation was now behind us.

The US also delivered a lower-than-expected inflation print, as well as a weak jobs report, and the market reaction was similar to the UK. Bond markets moved higher and interest rate sensitive sectors enjoyed a burst of outperformance as investors took the view that US rates have peaked. Elsewhere, Eurozone data was consistent with the view that the region is in recession, and there were tentative signs that China’s economy is stabilising.

With global inflationary pressures continuing to subside, and following October’s sharp fall, the UK is looking less like an outlier. However, base effects mean further substantial falls in UK headline inflation are unlikely until February or March next year. European economic data looks increasingly at odds with the European Central Bank’s hawkish stance, and we think they’ll be the first major central bank to cut rates, next year.

Despite the prospect of lower interest rates, we expect the US economy to hit a soft patch in the coming months. Higher rates are still working their way through the economy, and various leading indicators point to a rise in unemployment. Growth should weaken further in the UK and Europe next year, testing the higher for longer narrative, and we expect rate cuts from their central banks ahead of the Fed.

However, a period of weaker growth or even a mild recession does not necessarily mean lower asset prices. Bonds will generate attractive total returns in such an environment, and lower interest rates will also provide a tailwind for equity markets. Areas of the market which have underperformed since interest rates began rising may see renewed investor interest. UK small and mid-cap stocks are one such area.

Important information

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

Written by:
Charlie Lloyd
Head of Investment, Skerritts

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