A pivotal year is impending
After a tough couple of years for the UK economy, there are ground for cautious optimism in 2024. Inflation is coming down reasonably rapidly, bond yields have been following and the market is pencilling in interest rate cuts to come. The main question around rate cuts is the timing. As long-term investors we are indifferent to the precise timing, but suspect cuts are unlikely before the second half of the year.
In that period (October specifically) the markets will also be marking the two-year anniversary of the Liz Truss/Kwasi Kwarteng mini-budget. Borrowers on fixed-rate mortgages taken out in the days and months after that event should breathe more easily as they are able to re-set their loans. The average two-year fixed rate deal peaked at 6.65% on 20th October 20221. This, of course, was for those that could access mortgages. Many lenders didn’t just re-price their products higher, they withdrew plans as wholesale funding costs leapt. New fixed rate deals have already fallen to sub 4.0% (a five-year deal from Yorkshire Building Society announced on 11 January) and this before we’ve even experienced any base rate cuts.
Source: Columbia Threadneedle Investments and Bloomberg as at 3 January 2024. RICS = Royal Institution of Chartered Surveyors
As the prospect of cheaper borrowing costs has gained momentum, so the housing market has begun to show tentative signs of stabilising and even improving; the Halifax has reported house price rises for 3 consecutive months2 and the Royal Institute of Chartered Surveyors forward looking data has turned the corner more positively.
That the UK has moved on from the challenging Truss/Kwarteng episode should provide for significant relief and an uplift in sentiment – although we need to caveat that with this being an election year and confidence/sentiment having the potential to be knocked back again by new unforeseen political dramas.
A big year for global democracies
It is not just the UK that is expected to go to the polls this year. More than 70 countries, representing around 50% of global adults and a larger proportion of global GDP, are due to hold national elections in 20243. Taken collectively, the results will help determine who controls and directs the world in the coming years. Among those casting their lots in 2024 are some of the largest and most powerful countries (the US, India, Russia). In Europe, as well as the UK, there will be elections in Austria, Belgium, Croatia and Finland. In June, there is also an election for the European parliament.
Focusing on the UK, as the year evolves it will be interesting to see if more differentiation in economic policy transpires between the two main UK parties. At the present time, beyond inheritance tax (there has been discussion that the Conservatives may scrap the tax while Labour would retain and possibly overhaul it) there appears little major difference in policy.
In the portfolio
OSB, a specialist mortgage lender in the UK focused on selected sub-segments such as buy to let, remains one of the largest positions in the portfolio. While borrowing costs for landlords went up rents did too, as supply and demand metrics underpinned the sector. This went some way to offsetting the impact of higher base rates. Impending lower interest rates should make for a more supportive environment going forward. Vistry, another significant holding, is a housebuilder producing properties largely outside of the private purchase market and is our response to recognition of a structural shortage of housing in the UK.
Outside of interest rates, AI will remain a significant transformative theme and we must prepare for it to affect everything. It could be for the better, e.g. for our investments such as AstraZeneca it could be a game changer for drug trials. And, greater automation could garner efficiency gains for Burford Capital (legal finance and advisory activities) and RELX (information and analytics) among many others.
An income underpin
If the economy is stable and inflation continues to come down (if, because a notable new source of pressure is emerging in the form of a rise in shipping costs due to diversion away from the Red Sea) the outlook for company earnings looks healthier and this in turn should be positive for dividends. Even in the preceding challenging period, however, we have been able to keep our dividend trajectory positive, growing our dividend at almost twice the rate of inflation since launch thirty years ago.
As always, despite the best analysis of economics and company balance sheets, geopolitics could throw many a well-sourced assumption off course. That could be in a positive way (it’s only January so we are starting as we would like to go on – as optimists) or in a negative direction. Regardless, we remain confident that our choice of investments translates to a resilient portfolio even if the waters are choppy.
1 Moneyfacts Year in Review 2023 – Mortgages | moneyfactsgroup.co.uk 1 December 2023.
2 Halifax UK | House Price Index | Media Centre 5 January 2024
3 The world goes to the ballot box (ft.com) 5 January 2024
