In the classic Second World War film ‘The Great Escape’, the odds of Allied prisoners of war escaping captivity were long. Nonetheless, the prisoners hatched a plan and while 76 fled, only three made it to freedom.
The odds of escaping a sharp downturn were similarly stacked against most economies in 2023 as they grappled with high inflation and the biggest interest rate shock for 40 years. There was just a small chance of success, but so far it appears many economies avoided a recession – just.
Consequently, markets rallied, driven by job creation, strong consumer spending, higher company earnings, the rise of the Artificial Intelligence (AI) theme and signals from central banks, including the Federal Reserve (Fed), that interest rates would be cut in 2024.
Of course, many other factors drove growth in 2023 and reduced fears of a hard landing. Against this backdrop, we consider the key themes that investors should be looking at in 2024.
Equities are likely to outperform bonds if listed companies continue to achieve top-line sales growth and maintain their resilient corporate pricing power. This can support margins and help earnings grow to drive share prices higher.
US equities could also get a boost if investors withdraw some of the $1.4tn they poured into money market funds in 2023 and reinvest the proceeds into the stock market.[1]
That’s not to say that the environment isn’t right for bonds. If more central banks follow the Fed’s signals and cut interest rates, this should lead to higher bond prices. But on balance we believe equities are well placed to deliver better relative returns.
Artificial intelligence (AI) stocks, led by the ‘Magnificent Seven’ - a collective term for seven companies that include Google parent Alphabet, Apple, Amazon, Nvidia and Meta (formerly Facebook), Microsoft and Tesla - propelled a large chunk of last year’s gains in the S&P 500.
If a recession is avoided in the United States in 2024 and interest rates are cut, we could see the market broaden beyond AI stocks into unloved areas of the market, like energy and smaller companies.
A broad stock market recovery is a positive sign for investors since it indicates a healthier economic outlook. However, it remains important to own core quality stocks of companies, defined to include those with strong balance sheets and attractive profit margins.
The UK has been out of favour among investors for a long time. A combination of uncertainty caused by Brexit, a bias toward cyclical companies and lack of technology giants has meant the UK stock market has had an unfavourable mix of businesses. A weaker economic outlook for the UK hasn’t helped. The result is a stock market trading at a low valuation, which could offer an attractive entry point for investors. Though it is not yet clear what the trigger for a UK revival will be.
On balance, we believe investors should steer towards internationally focused UK businesses, rather than those with a greater domestic bias. That’s because there are still plenty of multinationals in the UK that are exposed to the global economy, which is expected to grow faster than the UK in 2024. Moreover, UK internationals offer a favourable earnings outlook compared to domestics. In addition, investors do not take on the risks related to UK politics and its vulnerability to higher inflation.
Bonds have been out of favour for the last few years and for most of 2023 government bonds were on course to post another year of negative returns. However, in the year’s final quarter government bonds rallied strongly as the market took the possibility of central bank interest rate cuts more seriously.
This year is likely to be a favourable environment for government bonds as growth slows, inflation continues to decelerate and particularly if central banks do initiate interest rate cuts.
The US dollar rallied over the summer of 2023, as the Fed’s rhetoric hinted at keeping interest rates elevated and this attracted capital inflows. However, as the conversation became more dovish, the greenback weakened from $1.21 in early October to $1.27 by year-end.
The US dollar is typically sought after when there’s fear of a global recession but with this abating it’s likely to lose its appeal further in 2024, particularly as appetite reignites for other major currencies, like the Japanese Yen and the British Pound.
Gold has proved resilient in 2023. That could continue in 2024 given its role as a portfolio diversifier. It is also a quasi-alternative to fiat currencies (like the US dollar). Gold’s perceived safe-haven status could also play a role in portfolios amid rising geopolitical tensions.
The gold bullion price soared past $2,000 per troy ounce to a record high in April 2023. Support for gold continued well into the third quarter of 2023, with physical demand reaching 800 tonnes by the end of September, according to the World Gold Council [2]. In December, the price reached a new all-time high of $2,111 troy ounce before retreating slightly at the end of the year.
The rallies were supported by central bank bullion purchases following Western financial sanctions against Russia. Gold could perform well in 2024 if central banks continue to purchase it and the Fed cuts interest rates.
In 2023’s outlook, the global economy was nursing its way through an inflationary hangover as major bond and stock markets had fallen sharply in 2022.
The macro backdrop in 2024 appears relatively benign for investors. As the probability of a sharp downturn lessens, opportunities are unfolding beyond AI-led tech stocks to include smaller companies and energy stocks, UK internationally focused businesses and government bonds. In 2024, we remain optimistic that a deep recession can be avoided.
Gold usually underperforms when interest rates rise, but we saw it disconnect from that role the past couple of years. We could see that continue in 2024 with gold rising alongside equities and bonds. Gold is typically sought during times of political unrest and could prove a good diversifier as we head into a major election year, where more than half the world’s population heads to the polls.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. Details correct at time of writing.
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