It’s the time of year to cast our minds forwards and think about some of the factors that could drive markets in 2024. Rather than bump up against Mystic Meg outlooks, we’ve thought about events, both likely and unlikely, to help you consider the future…
We go into 2024 with inflation and growth already weakening as the lagged impact of the rate hikes and COVID quirks work their way through the economy. It’s also interesting to note over half of the world’s population will go to the polls in 2024, so political uncertainty will be a factor in driving market sentiment.
So, lets spin the wheel of fortune and ponder what could happen in 2024. Just to really cause myself some regrets, I’ve also added a rating out of 10 (10 being the most likely) for each of the scenarios….
1. Table Mountain turns into the Matterhorn 8/10
The Bank of England has been at the forefront of the ‘higher for longer’ argument, with Huw Pill and Andrew Bailey very reluctant to raise the prospect of lower rates amid ongoing wage strength and inflation still well above target. Hence the Table Mountain path they have laid out for rates. Indeed, some members of the MPC are still voting for higher rates. History shows the path of interest rates looks more like the Matterhorn than Table Mountain though. For now, the BoE seems comfortable with watching and waiting, and possibly hoping that they can pull off the elusive ‘soft landing’ in bringing down inflation without causing too much collateral damage. In fact, the contrarian view could be that Bank of England become the first major central bank to cut interest rates…
2. China REALLY stimulates 4/10
China’s rapid reopening after extended Covid lockdowns in early 2023 was a welcome surprise but since then the economic rebound, after a decent start, has been underwhelming. With the Chinese property market – some 30% of GDP – in the doldrums, and the economy in deflation, expectations for broader stimulus remain. If the economy weakens further in 2024, further stimulus appears likely. This will have a positive halo effect on the wider region and would be a useful support for global growth at a time when western economic growth is so sluggish.
3. Bank of Japan do the unthinkable 8/10
4. Higher for longer means higher for longer 4/10
5. Inflation reaccelerates 5/10
History shows inflation tends to return after the initial wave, as second order effects, not least wages, prompt a cycle of higher prices. This inflationary wave began with the huge increases in money supply around the pandemic, amplified by supply chain disruption and then a huge energy shocks Central banks are not ready to declare victory quite yet, however, and this is why the ‘higher for longer’ messaging may well continue for a little longer than markets might hope. Central banks will not want to curtail growth or create unemployment, but a recession is likely the most effective method of making sure that inflation can be brought sustainably back to target.
6. The labour market fails to weaken 7/10
The consensus view that prevailed for most of 2023 was that US unemployment would rise as interest rate hikes began to bite. Yet with companies in solid financial shape, employers are reluctant to let go staff that they struggled to hire or re-hire after the pandemic. Whilst vacancies and temporary jobs have fallen, US unemployment, at 3.7%, remains close to recent historic lows. A soft landing, or even a mild recession, may well see unemployment push higher, but unless we see a much deeper slowdown than expected, unemployment will likely stay relatively low. In an election year, with employment so important to both consumer sentiment and voting intentions, expect plenty of pressure on the Federal Reserve from the Democrats to cut rates, and Republicans to cry foul when they do so.
7. German recession = European recession 9/10
With Q3 2023 growth negative and the data for Q4 not looking much better, the eurozone may already be in a technical recession. The economic engine of the currency bloc, Germany, has seen growth evaporate with industries struggling with higher energy costs but the energy shock caused less damage than feared overall thanks to a mild winter last year. What can help the eurozone this time round? Given inflation is closing on target levels, maybe some interest rate cuts from the European Central Bank. But rate cuts alone are unlikely to herald a return to strong growth. With substantial fiscal stimulus looking very unlikely, Europe looks set for a year of weak economic growth.
8. OPEC puts the squeeze on 3/10
With slowing global demand, OPEC have been keen to keep a floor under oil prices as members seek to balance their budgets. However, with significant growth in oil production in both North and South America, and plenty of Russian oil finding its way onto the global market, OPEC have been unable to halt the decline in oil prices. OPEC now controls only half the global oil supply, so it would take significantly more drastic production cuts to have a significant impact on the oil price.
9. EM rate cuts fuel a boom 6/10
Many of the emerging market economies saw central banks swift to react to inflationary pressures by hiking rates. Such hikes have slowed economic activity, but with inflation easing rapidly, there is now plenty of scope to cut rates. In Brazil for example, even with a recent 50 basis point cut, interest rates are still over 700 basis points above inflation. With President Lula continuing the economic policies of his predecessor, a series of rate cuts could see the economy prosper from here. A repeat of the economic boom of Lula’s first term in office would need another commodities boom – and while the green transition may help over the long term, stronger global growth would be more of a tailwind for now.
10. UK house prices catch down with reality 3/10
Given that house prices and their inexorable rise appears to be at times the backbone of UK society, any downturn in the housing market has both economic and political consequences. House prices have recently stagnated, with transaction volumes thin, an inevitable result of mortgage rates normalising after over a decade at ultra-low levels. While mortgages account for a lower proportion of home ownership, the impact on first time buyers and the buy to let market from higher rates means that housing transactions may well remain subdued but the fundamental of a lack of supply will likely keep a floor under prices.
11. A Labour landslide 6/10
12. Trump triumphs 7/10
Half the time it seems Donald Trump is still fighting the last election result, but the 2024 US election will come into focus in January as the primaries begin. For now, it looks like a re-run of the 2020 contest, and an ‘unpopularity contest’ between Biden and Trump set for 5th November. In an election with around 160 million votes, the result will be decided by around 65,000 votes across six ‘swing states’. Polling is tight, but suggests Trump is ahead in these marginal states, and is trusted more on the economy. Biden is also deeply unpopular, despite enormous government spending programmes and a large budget deficit.
13. Middle East Conflict breaks out 3/10
14. Russia and Ukraine move towards a peace deal 3/10
This is a very tough one to call but on the ground the situation is now close to stalemate. The Ukrainian people and army, with the financial support and goodwill of the western world has managed to limit the world’s 5th largest army over the past 18 months, Ukraine appears to be suffering from some fatigue in support from the west, with funding from the US and EU now mired in domestic political battles. For now, Ukrainian President Zelensky still has the support of Western leaders, but the political appetite for never-ending support will fade. The two sides are very far apart in terms of their stated goals, so will pragmatism prevail? It’s possible, but likely not in the short term. Would Ukraine accept the loss of territory if it could be offered EU membership? A great deal more blood will likely be shed, for very limited gains, before any sort of peace talks take place.
15. The Magnificent 7 deliver mediocre returns 6/10
Seven companies have driven almost all of the gains in US equities in 2023, with a rebound from the poor returns of 2022 turbocharged by the hype around Artificial Intelligence. The S&P500 has a concentration problem, a real headache for active managers, with the “magnificent 7” stocks — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla — collectively holding a near 30% weight in the S&P500 Index. Both Apple and Microsoft individually have a higher market capitalisation than the entire FTSE100 in the UK. So, can they underperform the wider market? They certainly need to continue to deliver on earnings expectations to sustain their valuations – that may be easier for some than others. These seven companies appear to have become an asset class on their own and seem to be seen as a ‘safe haven’ at times. History shows such concentration does not tend to end particularly well. Some of these stocks may remain ‘magnificent’, but all 7? Probably not.
16. The US Dollar loses its lustre 6/10
This is a trend that has already started in 2023 and is no surprise given the differing expected trajectories of interest rates. There are always other factors at play – any risk off event sees the Dollar find support – but with the Federal Reserve cutting rates probably from the Spring while the Bank of England and European Central Bank keep rates ‘higher for longer’ the USD could see some further weakness. Japan is the big unknown. A weaker Dollar should be welcomed outside of the US given it represents a loosening of global monetary conditions, which would be a tailwind in an environment of subdued growth.
17. Small cap outperforms 7/10
After a torrid time over the past few years, small cap investors may be emerging from their hiding places right now, with the prospect of ‘soft’ economic landings and interest rate cuts giving investors to take another look at a very beaten-up part of the market. Some companies probably should be beaten-up – just over 40% of the Russell 2000 index in the US failed to make a profit in the past 12 months, but closer to home UK small cap companies look in reasonable shape but are priced at valuations that imply a deep 2008-9 type recession. Small cap tends to outperform significantly on the other side of an economic downturn, so if we do see the worst of the economic data in the first half of 2024, a combination of lower rates and attractive valuations could put this sector of the market in the spotlight once again.
18. Bond Vigilantes loom large 4/10
It’s been quite the rollercoaster for bond investors in 2023. Will 2024 be a more normal year, where government bonds resume their traditional boring role in portfolios – stable returns and a yield above inflation? It looks possible, not least as inflation eases and interest rates follow. Any wobble in the bond market will be driven by inflation worries or simply too much issuance as governments have to pay up to fund their ever-growing deficits. Government bond issuance has been gobbled up by markets though of course we should not forget the biggest buyers of debt over the past decade – the central banks – are now a seller. The debacle in the UK in September 2022 is a reminder that the bond market’s patience has limits and with governments bouncing off fiscal limits across the western world, the willingness of bond markets will be necessary to fund government spending.
19. Corporate earnings fail to meet lofty expectations 7/10
The consensus view is for high single digit earnings growth next year but this does not correlate to the usual outcome for earnings in a slowdown, or a recession. In the latter, history shows falls on average can be around 30%. Even if economies ‘muddle through’ the outlook for companies in a more normal rates environment looks challenging, with margins under pressure from higher wages. However, with the peak of interest rates in, markets multiples have room to expand, particularly in areas which have been de-rated as a result of central bank policy (i.e. small cap). Is this something we should fear? In a way, no, because this is the environment where fundamental analysis and stock picking should deliver superior returns. The rising tide of cheap money that has floated all boats over the past decade or so has turned, and this should be a market where good companies with strong balance sheets and cashflow are rewarded, while leveraged companies with weak balance sheet and low/no profits struggle, or even go out of business. Maybe fundamentals will make a comeback.
20. Haircuts in US commercial real estate 4/10
Interest rates may begin to fall, but they won’t be back to the extremely low levels we saw before and during the pandemic, which means real estate financing will become much harder. The overcapacity in commercial real estate will likely bring some pain, not just to property companies but also the banks that funded them. Closer to home, UK property REITs have been hit hard by the higher rates environment but the outlook for well managed investment companies whose borrowing costs are manageable looks reasonable, and given the sharp falls in share prices, there are clear opportunities in this space for long term investors.
21. The UK Investment Trust market reopens 8/10
After a buoyant decade, the UK investment trust issuance market has ground to a halt. Much of the sector’s issuance was concentrated in yield alternatives, such as property and renewable energy. With interest rates now sharply higher much of the sector has de-rated lower. Boards and managers are finally grasping the need to address discounts to Net Asset Values with share repurchase programmes now commonplace.
We suspect the renewable energy generators will lead from the front as the UK looks to decarbonise its infrastructure and create more energy security, rather than rely on gas imports.
22. AI takes all of our jobs 1/10
I’d be surprised (and a little upset) if an AI Large Language Model is writing this commentary this time next year but the AI theme does appear to be the next significant technological revolution. It has significant consequences for productivity in several sectors, not least those that involve the analysis of large sets of data. The winners and losers of AI are yet to emerge; it is unlikely to be as simple as just the ‘Magnificent 7’ US tech stocks though. Technology adoption is increasingly rapid and having AI embedded is likely to be the future of work. The current record for an app to reach 100 million downloads is held by social media app Threads (hours) and before that ChatGPT (5 days). Records are there to be broken…Microsoft Copilot could take the crown in 2024. Over time, AI will create employment challenges and opportunities, but large sections of the workforce should be safe for a good while yet.
23. EVs for Everyone 3/10
2024 won’t be the year where we all collectively make the shift to a new way of driving, but the direction of travel is clear, and the transition away from fossil fuels still has political momentum globally. The green transition has huge implications for the global economy and policymakers, presenting significant resource and infrastructure challenges. Long term investment at huge costs will be required on a timescale that is well beyond the time horizon of most politicians. But it opens up new forms of investment as governments seek private partnerships to fund green investment and companies come to the market to raise capital.
24. Swansea City make the play offs (or better), England win Euro 2024, Team GB win a record haul of Olympic medals, Lewis Hamilton wins the F1 title, Mark Cavendish wins another Tour de France stage and I achieve my Strava cycling target for third year in a row. 1/10
In the first podcast of the year, we look ahead to events and trends which could drive economies and financial markets. What if central banks ease monetary policy and what impact will politics have as half the world’s population head to the polls? What if artificial intelligence takes all of our jobs and will Swansea City FC make the play-offs?
Adam and Anthony chat all of the above and more with Charlene Malik and George Curtis from the fittingly named TwentyFour Asset Management.
To listen to the podcast here or follow Multi-Manager People Podcast on iTunes.