After a tough couple of years for the UK economy, there are grounds for cautious optimism in 2024. Inflation is coming down and the market is pencilling in interest rate cuts. In October, the two-year anniversary of the Liz Truss/Kwasi Kwarteng mini-budget, borrowers coming off fixed-rate mortgages can breathe a sigh of relief and re-negotiate 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 below 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.
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; 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. We’d caveat the good news with this being an election year, however, and the potential for new, unforeseen, political dramas.
A big year for global democracies
It is not just the UK that is going to the polls this year. More than 70 countries, representing around 50% of global adults, 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 votes in 2024 are 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.
The risk/return trade off
Regardless of which party gets into power, inflation is coming down and rate cuts are on the horizon so it could be a good time to re-visit personal investments. In the last couple of years, holding cash has been a relatively attractive option as interest rates have held high but shares have a better long-term record when it comes to outpacing inflation. With inflation headed lower than the rates achievable on some savings accounts a stocks and shares ISA could be an option. However, for this type of investment you need to be comfortable with the risk that share prices could fall as well as rise and you may get back less than you invested.
If you can tolerate the increased risk then this could be a way forward. It’s also worth remembering that part of the trade-off between risk and potential reward can be managed by investing through funds, which can diversify your investments across many thousands of different shares and/or bonds.
A regular income from dividends
In our assessment, if the economy remains stable and inflation continues to come down 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. Since launch thirty years ago we have grown our dividend at almost twice the rate of inflation (there is no guarantee that dividends will continue to increase). In addition, our total net asset value per share grew 11.2% last calendar year, a return ahead of inflation and superior to the returns investors would have received from government bonds or cash.
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 (we are starting the year 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.
Investment Risks
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
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