I’m Neil Birrell, Premier Miton’s Chief Investment Officer. Thanks for reading ‘Market Watch’, our monthly summary of the key events in financial markets.
For information purposes only. Any views and opinions expressed here are those of the author 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.
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December – in brief
- The US Federal Reserve provided the clearest signal so far that interest rates have peaked.
- Similar trend in the UK and Europe, but for different reasons.
- Financial markets continued their strong end to 2023.
- 2024 will bring plenty to occupy our thoughts.
All good things come to those who wait
In the past few months, I have consistently referred to the peak in inflation and the associated peak in interest rates being the focus of investors around the world. In November the US central bank, the Federal Reserve (Fed), hinted that they could be close to that point and in December they went far enough that observers became convinced that this was the case.
We rapidly moved to the assumption that inflation was tamed, interest rates had indeed peaked and even went as far as to expect interest rates to start being reduced next May or possibly even March. This was because the US economy remained robust whilst inflation was falling, allowing the Fed to manage down interest rates in the expectation of avoiding recession, which might have been the outcome from interest rates staying too high for too long, as that would reduce economic activity and growth.
It was similar, but different, in the UK and Europe. Similar expectations for inflation and interest rates ensued, but different in that it resulted from the economies being weak, thus requiring interest rates to fall, to provide support.
And then you get paid for waiting.
Bond markets and stock (equity) markets had been on an improving trend since just before the end of October in the hope of a change in outlook and December provided a profitable end to the year. Bond markets rose sharply, posting a strong short term gain rarely seen before. Equity markets also posted strong returns in December across the board. In particular, small and medium sized companies in the UK did well after an elongated period of relatively poor returns.
The attractiveness of riskier assets such as bonds and equities in periods of rising inflation and interest rates, relative to the lower risk return from cash deposits not seen since 2007 has been clear and therefore it should not be a surprise that this reverses as the economic conditions do so.
But don’t get over excited.
There is a risk that the best expectations for falling interest rates are not met. Inflation may not fall as hoped or economies may stay stronger than thought which could result in some of the recent gains being given up. Furthermore, financial markets rarely move in a straight line, one way or the other, so it is unlikely to be a smooth path, but as it stands, the outlook is more positive than it has been for some time.
2024; a year of the polls
With the wars in Gaza and Ukraine making the headlines for nearly 2 years now, geo-politics has created human tragedy that has had a significant economic impact as well.
2024 will see elections in over 50 countries including the US, UK, India, Mexico, Russia and South Africa, meaning that over 2 billion people will have the opportunity to vote. This will obviously bring change within each country and region, but it could also be formative for global geo-politics and the global economy, with the US probably being the most influential, depending on the outcome of its election.
Elections are very difficult to predict and what may follow as a result, even more so. Therefore, making investment decisions ahead of them can be a fool’s errand, however, there are going to be plenty of political consequences to consider as we go through the year.