Alastair Power, Redmayne Bentley’s Investment Research Manager, Mark Robins, Investment Manager and John Taylor, Stockbroker, look ahead across 2024.
They consider the trends to watch in UK and global financial markets in 2024. All believe interest rates will be key, but when asked to consider the investing and stock market trends to watch in 2024 there were some differing opinions with the tech sector, the rise of the Indian market and global supply chain disruption all featuring. Below are their thoughts:
1: Interest Rates
Alastair Power, Investment Research Manager
Central bank activity in raising interest rates was a dominant theme in 2023 as they looked to tackle elevated inflation rates. With these increases now seemingly over, investors have turned their attention to the pace of interest rate cuts. In the US, markets are already signalling a 66% probability of a cut at the March meeting and to finish the year with interest rates in the region of 4.5%. In the UK, expectations are for interest rates to finish 2024 slightly lower than present at 4.75%.
Interest rates, our number one pick for things to watch, are a key focus point in the coming year. Raising them is designed to slow down economic activity through raising the cost of finance and encouraging saving over spending. Cutting them is designed to reignite economic activity and given their importance in the pricing of assets and the cost of finance, their future path is something we should all be mindful of. Expectations lead financial markets in the short-term, so it will be interesting to see when and by how much the central banks cut interest rates in the year to come. Faster cuts than expected could see markets rally, but slower than expected could see some more volatility.
John Taylor, Stockbroker
Market analysts widely believe that the UK has reached terminal interest rates, signalling a potential shift towards rate reductions. The Bank of England (BoE), guided by data, now faces a challenge in managing a soft landing for the economy amid the looming recessionary impact of higher rates – particularly in the wake of an unexpected GDP contraction in October. Investors are apprehensive that persistent inflation could lead the UK into a period of stagflation, posing a threat to the prospect of attaining a smooth economic transition.
While the US Federal Reserve expressed a dovish stance in December and signalled potential rate cuts early in the coming year, the BoE diverged by maintaining ‘higher-for-longer’ guidance and emphasising the ongoing battle to bring inflation down towards its 2% target. However, if inflation subsides next year and labour markets display signs of weakness, a rate decrease in the latter half of the year appears likely, carrying potentially significant positive impacts for asset values
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Mark Robins, Investment Manager
Much of 2023’s narrative focused on whether interest rates had peaked. 2024 will be the year that discussions shift to when interest rates will fall across much of the developed world and by how much. The obvious beneficiaries of falling interest rates are fixed interest assets which will see prices rise as yields fall, although credit quality will be an important consideration should there be an economic slowdown. Income-focused investments such as Real Estate Investment Trusts (REITs) and infrastructure funds may start to become attractive again, with secure, inflation-linked income streams looking increasingly worth the risk premium in addition to the potential for narrowing discounts to net asset value which should translate into capital growth. In the world of equities, a “new normal” of higher interest rates will necessitate a shift to quality companies with strong balance sheets and a high return on capital that are better positioned to weather any potential economic downturn.
In a world without ultra-cheap money, highly leveraged companies may struggle when it comes to refinancing debt, while companies looking to expand, adopt artificial intelligence technologies or transition to clean energy solutions will have to think twice about the cost of capital. Governments will certainly be less eager to add to fiscal deficits with already unsustainable national debt levels.
2: The Tech Sector
Alastair Power, Investment Research Manager
Artificial Intelligence (AI) was a consistent discussion point through 2023, with its tailwinds sending the US tech sector higher. Names such as Microsoft and NVIDIA have been significant beneficiaries, producing stellar returns in the year. Expectations are high for this trend and any misses to forecasted growth figures could see share prices heading lower in the short term. AI is clearly a technology with huge potential, but it has contributed to a small number of companies holding a large weight in the flagship US index, the S&P 500. It will be interesting to see if expectations are met in the coming year for a sector with a potentially significant tailwind.
3: The Rise of India
Mark Robins, Investment Manager
India is one country to watch in 2024, combining positive demographics, stable politics, and impressive GDP growth forecasts of 6.4% this fiscal year. India’s 1.4bn-strong population is now the largest in the world with a median age of 28, indicating a large working age proportion which is expected to translate into a growing middle class. The country still has a long way to go in raising living standards with GDP per capita of US$2,400 compared to China’s US$13,000 and only 35% of the population living in urban areas, presenting a clear growth opportunity. Through the introduction of Unified Payment Interface (UPI) payment system, India has been able to digitise its financial sector for large swathes of the population and has incentivised local manufacturing through Production Linked Incentives (PLI) and the ‘Make in India’ initiative to help address its negative trade balance and boost domestic manufacturing.
Investors in India should tread carefully with valuations of Indian equities high by historical standards and relative to other Asian markets with price to earnings of 25x and India’s Nifty 50 Index up 16% this year and on record highs. Indian companies have a low free float (publicly traded shares) of 40% which could translate into higher volatility. High energy prices and a slowdown in exports could also weigh on the countries trade balance, while there are boundary issues with Pakistan over Kashmir and China over Ladakh. As investors continue to look for growth opportunities outside of China to better diversify portfolios, India, which is forecast to be the third largest economy by 2030, is a growth story that can no longer be ignored.
4: Energy Security
John Taylor, Stockbroker
Energy security and the transition to cleaner energy has become a focal point for investors with an increase in infrastructure investments being made by some of the world’s largest private capital groups such as KKR and Blackstone. The current UK Prime Minister, Rishi Sunak, has recently scaled back environmental policies, such as postponing the phase-out of polluting cars. However, in the event of a new Labour government, there is an expectation of a strong commitment to advancing the transition to a low-carbon economy. Depending on the ruling party, potential investment opportunities may emerge.
5: Supply Chains
John Taylor, Stockbroker
Predicting the outcome of conflicts in the Middle East and Ukraine is challenging, future events are as unpredictable as those that catalysed the conflict, with potential for further escalation of tensions that may lead to significant supply chain disruptions, higher energy prices and the destabilising effect of higher global food prices. These combine to elevate the risk of recession in the UK and other developed markets which rely on globalised supply chains. The conflict in Gaza has precipitated attacks on shipping in the Suez Canal, a critical juncture of global trade. This has resulted in shipping companies diverting to longer and more costly routes, impacting trade between Asia and the US east coast.
6: Politics and elections in 2024
Alastair Power, Investment Research Manager
2024 is a year of elections with over fifty national elections scheduled. The headline event comes in the US, where it is likely we will see a repeat showdown between former President Donald Trump and current President Joe Biden. The UK general election, currently scheduled for January 2025, could also come in 2024 if Rishi Sunak decides to bring the timeline forward.
Election cycles always bring an air of uncertainty, but with the effects of inflation and interest rates also under consideration, the coming year is shaping up to be a tumultuous one from a geopolitical standpoint. It could be a nervous time for businesses, with significant new investments on the shelf whilst we wait to see how the political landscape unfolds.
John Taylor, Stockbroker
Investors are considering the impact of a potential change in the UK government in the anticipated 2024 general election. If Keir Starmer’s Labour party, currently leading in the polls, wins, it could potentially signal a move towards more centrist policymaking.
Labour would have to balance an expansion of social policies against the existing government deficit which is around 100% debt to GDP. The next government, will also encounter limited fiscal headroom, potentially impacting its ability to address a recessionary outlook with additional stimulus.
Mark Robins, Investment Manager
National elections including in the United States, Russia, India and the European Union will impact approximately 3.2bn people in countries with a combined gross domestic product (GDP) of close to US$44tn. All elections have potential ramifications from an economic and geopolitical standpoint. In January, Taiwan re-elected the pro-independence Democratic Progressive Party (DPP), which may heighten tensions with China and delay the recovery of Chinese assets hit by a slowing economy, rising debt and a property crisis. Spring will see elections in India, in which a record third term for Prime Minister, Narendra Modi, could help fuel India’s continued economic rise and stock market rally. November will see the US elections, with Donald Trump currently ahead in the Republican primary and presidential polls. His last tenure consisted of US protectionism, tax cuts, and trade wars all of which has the potential to unsettle global equity markets.
In our investing decisions it is important that we adopt an increasingly global mindset as wealth shifts away from the unloved UK market to other regions with more disruptive industries, technology exposure and greater growth potential. Around 82% of FTSE 100 earnings, and 57% for the FTSE 250, are from overseas markets so what happens next year in South Africa, Indonesia and Mexico may impact the returns and profits of many of the companies and funds we hold for our clients. For global equities, 2023 was marked by the dominance of seven US technology companies that benefitted from the surge in interest in artificial intelligence, but 2024 should start to see a dispersal of some of this wealth to new disruptive entrants and markets as investors seek out growth.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares and investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance.