In the end, 2023 turned out to be reasonable for many owners of equities and bonds, with good rallies in the final two months generating some positive returns. The gains were based on anticipation of what is to come. Investors and commentators are looking forward to the end of interest rate rises and the start of some falls in the cost of borrowing in the advanced economies. There have already been cuts in China, Brazil, Hungary, Czechia, Poland and Chile.
The main story of 2023 was that of the leading central banks wrestling with inflation and working out how high and for how long they would take interest rates. The coming year should produce the mirror story – with the Federal Reserve (Fed), the European Central Bank (ECB) and the others deciding when they need to start their descent from the summit – and how much lower rates need to go.
Just as 2023 was dominated by inflation data – with central banks scrutinising the numbers for any signs of weakness –2024 will be more attuned to output and income data. Officials at the world’s central banks will want to avoid a recession based on the tight-money policies being pursued to bring inflation down to target.
The Europeans are likely to need to cut the cost of borrowing earlier than the US, as the main European economies are becalmed at best and facing downturns at worst. As markets see their views of lower rates reflected more fully in the forecasts, influenced by the words and actions of the central banks, equity investors will be more enthusiastic about interest-rate sensitive sectors and companies that can benefit from falling rates. This process started over the last two months as rate expectations shifted.
A mounting optimism
Investors will also warm to the idea of a more general pick-up in activity, as individuals and companies with borrowings will have more money to spend as their interest payments decline. The US economy has performed strongly in 2023 thanks to a large fiscal stimulus offsetting the monetary tightening. The country will not be able to do that again, as a hostile Congress continues to seek to limit spending by the Biden administration in an election year. As a result, its economy will also slow, allowing scope – as the Fed has now hinted – for some rate cuts to come.
Markets could be impacted by many events in 2024. The Russians are expected to re-elect Vladimir Putin to the post of president. There might be some movement by both Russia and Ukraine to see if a ceasefire could be negotiated in the long and brutal war. NATO is keeping out of the direct military engagements on the ground. Both the US and the European Union (EU) are wavering over how much more financial support and weaponry they can offer to Ukraine, creating some pressure for a settlement.
The Indian election in May is likely to see Narendra Modi re-elected as prime minister. His brand of Hindu nationalism has strong internal critics and faces an opposition attack, but the results of his policies since his election have been relatively helpful to strong growth. They have kept markets happy from a business point of view. The war between Hamas and Israel should eventually come to a ceasefire, with these likely to lead to difficult talks about how the Palestinians should be governed. The US and NATO will not want to be drawn into a wider conflict in the Middle East.
US President Joe Biden wants to avoid new foreign military commitments and his rival Donald Trump wants the Ukraine conflict settled. November 2024 will see a presidential election in the US. Currently, President Biden and Mr Trump are way ahead of rivals in their respective races for the Democrat and Republican nominations. Many Americans think President Biden too old to run and many Democrats think Mr Trump is totally unsuited to be a candidate at all. Both men are unpopular with the wider electorate, yet their parties seem determined to run them.
Of course, there could be developments which make it impossible for either candidate to run but, this aside, a repeat of the previous contest looks as if it will be close. A second Trump Presidency would wish to downplay some of the environmental and welfare programmes of the Democrats and go for lower taxes. Both men seem to like running the economy for growth with large deficits. Neither favour committing US forces to new wars.
There will be attempts to direct more investment funds to emerging economies struggling with the costs of ‘net-zero’ targets.
It is fair to assume that 2024 will see our three big themes for world development play out. The digital revolution will sweep on. The last 12 months brought the potential of artificial intelligence (AI) to the attention of markets. So, 2024 will need to see more of this technology applied in the real world.
The big three companies involved in the AI developments – Amazon Web Services, Google’s owner Alphabet and Microsoft – will battle it out with companies developing rival technology and may offer some price concessions as a result. They will also need to settle their relationships with all the data providers and other sources of information that their AI services need.
Businesses will make more use of the AI co-pilot. This technology can amass substantial information through intelligent search before processing the output into intelligible tables or sensible prose. It aims to help employees raise their productivity or extend the quality and their product range. Individual businesses will be challenged to explain what they are doing to use this enhanced digital offering to leverage revenue and profits – and will doubtless spend more in the process.
Many countries will seek to travel the road to ‘net zero’, watched over by the United Nations and its climate-change-focused COP conferences. This will generate further government interventions in industry, particularly in the energy sector. There will be more regulations, further subsidies and additional carbon taxes.
There will be attempts to direct more investment funds to emerging economies struggling with the costs of ‘net-zero’ targets, and to renewable power, hydrogen, electricity grid expansion and other necessary developments to decarbonise. There will be renewed opportunities for investors to benefit from the move to renewable power as governments come to see they need to allow higher prices for the electricity to offer decent returns to those committing to new proposals. Lower interest rates will also help these projects.
Deglobalisation to continue
All of this points to continuing frictions in international trade. As 2024 dawns there are restrictions on the use of the Panama Canal as drought brings a shortage of fresh water to fill the locks. Some shippers are also unwilling to use the Suez Canal because of threats to vessels in the Red Sea by Houthi piracy.
Moves to carbon-border taxes are on the agenda, designed to cut imports of products made with favourably priced or lower-taxed fossil-fuel energy. President Biden will carry on with his Inflation Reduction Act subsidies and rules to encourage more onshoring od industrial activity. Brussels will proceed with its Next Generation EU agenda of a subsidised transition to ‘net zero’. There will be continuing disagreements between China and the US over trade, especially involving technology. This is unhelpful but unlikely to be sufficiently damaging to create a bear market on such news alone.
Lower interest rates, continuing recovery from the scars of the pandemic, better technology and falling inflation are all good themes as the wider backdrop of whatever drama lies ahead in 2024. Events may come along to test or disrupt. So, we need to be vigilant. As always, a New Year's resolutions for investors should be to be to take enough risk so that they make some money if things work out well but have also controlled the risks in case unforeseen events disrupts what looks likely to be a more positive year than 2023.
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