Does a soft landing or a bumpy road lie ahead next year?
UK equity specialists Matthew Tillett, Mahgul Ansari and Benji Dawes share their outlook for UK equities focusing on different areas of this market in 2024.
For information purposes only. The views and opinions expressed here are those of the authors at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Article snapshot
- After two years where macroeconomic fears and worries have dominated, 2024 may mark a welcome return to an environment where micro economic fundamentals reassert themselves.
- If inflationary pressures abate next year, then the UK consumer could be better off as inflation adjusted income grows faster than goods prices, providing relief from cost-of-living pressures.
- 2023 was a year that began with investor perceptions firmly anticipating a recession by the year end and closing with consensus anticipating a goldilocks “soft landing”.
UK equities – Value focused: Matthew Tillett
Premier Miton UK Value Opportunities Fund
“After two years where macroeconomic fears and worries have dominated, 2024 may mark a welcome return to an environment where micro economic fundamentals reassert themselves as the primary driver of share prices. The big macro question – will the monetary policy tightening lead to a global recession? – should be settled at some point during 2024. Whatever the answer, we expect it will lead to a change in the stock market environment, with time horizons lengthening again, as investors look beyond this period to the next cycle. As bottom-up fundamentals reassert themselves, this should prove to be an excellent environment for value driven bottom-up stock pickers to thrive.”
UK equities – Income focused: Mahgul Ansari
Premier Miton Monthly Income Fund
“If inflationary pressures abate next year, then the UK consumer could be better off as inflation adjusted income grows faster than goods prices, providing relief from cost-of-living pressures. Moreover, the UK ‘real living wage’ will be raised to £12 an hour in 2024. These factors are likely to boost consumers’ spending power on top of already high household savings relative to pre-pandemic years.
However, whether excess income from real wage growth will be used to top up savings in cash deposits, or go towards discretionary consumption remains debateable, as consumer behaviour is heavily influenced by what they are reading and seeing in the news. A trend in falling inflation and the prospect of a rate cut in the back end of 2024 may improve sentiment, reviving discretionary expenditure and possibly boosting the UK economy from the middle of next year onwards.
UK household savings are high, and these may surely be reinvested into the domestic economy sooner or later, if not in 2024. This bodes well for the UK economy.
Inflation falling to the government’s 2% target seems unlikely in 2024, given structurally higher cost of raw materials, cost of capital, and labour due to scarcity of supply. To resolve labour shortages and skills gaps in various sectors, corporates will have to step up investments in technology and AI, releasing productivity gains and underpinning profit recovery. Next year could be pivotal in this regard with a step up in investment in robotics and AI by corporates.”
UK equities – Growth focused: Benji Dawes
Premier Miton UK Growth Fund
“2023 was a year that began with investor perceptions firmly anticipating a recession by the year end and closing with consensus anticipating a goldilocks “soft landing”. Reflecting this, global indices have risen almost universally (China the exception). 2024 will be the reckoning. Will recession bite and how hard? Cracks are beginning to show, with corporates cutting back and swathes of redundancies by large white-collar employers, from investment bankers to management consultants. Given sentiment has moved from pessimism to optimism, the risks are now tilted downwards, particularly for the most highly valued stock markets.
Opportunity knocks, softly. Observing valuations of UK equities relative to global peers, the disparity is clear. The opportunities are nuanced. The UK remains two different markets with rather different and potentially opposing drivers. FTSE 100 is a nominal GDP growth play (Oil, Miners and Banks) while the 250 remains a UK rate play. If interest rates have peaked and growth is slowing, perhaps to a halt, then the case for UK small and mid-caps, which sit at low valuation levels, becomes extremely compelling on a relative basis. A highly active, all cap approach to investing may be required to navigate these challenges.
If the world shifts to adopt loose fiscal combined with controlled monetary policy, echoing the period post-World War II financial repression, this could provide conditions for an equity bull market.
Loose fiscal policy offers support to industries related to US initiatives such as the Jobs Act and the IRA, but with US federal debt at record highs and a budget deficit can such conditions be sustained without pain elsewhere?
The key challenge will be to deliver the now widely anticipated “soft landing” scenario, in the face of decades high refinancing rates putting pressure on indebted consumers and corporates to cut spending. With job vacancies falling fast and unemployment set to continue rising from post covid lows, this will be tricky. Risks from an increasingly fractious world are not insignificant.”
