What to consider as we continue in the 'turbulent Twenties'

Politically, geopolitically, economically we have seen a lot of flux. Inflation left consumers with fewer pounds in pockets and rising interest rates made mortgages and other household debt more expensive.

But the worst economic outcomes were avoided and the expected global recession did not materialise.

For investors, undisputedly we are in a better place now than we were at the top of the year – 2022 was exceedingly tricky, when both bonds and equities went into freefall – and we have seen a general improvement over the year (that wasn’t difficult when you consider the starting point).

The biggest risks to fixed interest surround refinancing requirements of governments and companies.

But the recovery has been lacklustre, and the ongoing volatility means we still haven’t found convincing answers to some of the questions facing global investors at the start of this year.

With this complicated backdrop in mind, what are the big factors that will be shaping investor sentiment in 2024?

Economic turbulence

The world continues to be a complicated place and the ‘turbulent twenties’ remains an apt moniker. The US economy is likely to slow further as 2023 rate hikes continue to bite and consumer demand weakens.

The big question on everyone’s lips will be ‘can the US avoid a recession?’

China should start to improve as the government is moving more decisively to stimulate the economy – a failure to reflate would cause problems.

We think a global recession will be avoided but we will see a continuation of low, but positive real growth.

Inflation uncertainty

This will continue to be a dominant theme in 2024 and the inflationary environment will continue to cool - we think disinflation is likely in 2024.

Some excitable investors out there believe the central banks will be quick to slash interest rates in the wake of a drop off in inflation.

But we don’t think this will necessarily be the case.

Central bankers will want to go down as a ‘Volcker’ (widely credited with ending an era of high inflation in the US in the 70s and 80s) rather than an ‘Arthur Burns’ (the chair of the Fed, discredited with keeping fiscal policy loose to enable Nixon to win a second term, letting inflation out of the bag).

We’re cantering hard and fast towards the US presidential elections

We think keeping a lid on interest rates for the time being, would be wise for central banks. And we expect to see rate cuts in the UK and US as summer approaches.

Political volatility

The geopolitical framework is brittle and not helped by political and economic volatility. We’re cantering hard and fast towards the US presidential elections, so many of the headlines in 2024 will focus on a ‘will he or won’t he’ outcome (the ‘he’ being Trump).

Another big election – small but big in terms of the outcome – will be the Taiwanese elections on 13 January 2024.

The decision of 14mn voters will have a significant impact on the trajectory of Taiwanese relations with China for years to come.

If it once again goes in favour of the Democratic Progressive Party then there will likely be a worsening of relations, geopolitical tension and investment terms, a flight to gold, US Treasuries and the dollar.

The great repricing – bond markets back to normal

Returns from fixed income markets were very varied in 2023. Some have done marvellously, others stuttering and barely clambering into positive territory.

The best thing to have done was to focus on areas less sensitive to interest rates and focus on areas of corporate and consumer credit.

For 2024, inflationary pressures seem to be receding – and inflation affects fixed interest markets in the way kryptonite affects Superman.

Given the current environment, taking large risks would be inappropriate and being selective is important.

So maybe it’s not unfair to assume that as inflation wreaked havoc on bond markets in 2022, disinflationary tendencies could reap rewards for investors in the coming months.

What central banks do in response remains to be seen but (and it’s a big but) if they do cut interest rates, then it could act as a spur to fixed interest markets, including government bonds which have lagged materially this year.

Of course – there are two big things that could derail this theory – the upcoming elections and economic growth, or the lack of it.

The biggest risks to fixed interest surround refinancing requirements of governments and companies – the ‘maturity wall’.

Equity markets in 2024

Equity markets broadly appear to be fair value, but valuations and sentiment are mixed. The US market remains relatively expensive and earnings optimism for 2024 is hard to believe.

Profit margins have narrowed from record-wide levels but have stabilised – they could improve in 2024. We do think that quality equities will perform well and should outperform in a downturn or a recession.

We think that interest rate sensitive companies could recover in 2024 and we remain positive on healthcare, infrastructure and renewables.

It’s a truism to say the year ahead is always an unknown quantity.

But the shock factors of the last few years (the pandemic, the war in Ukraine, rising tension in the Middle East) are testament to the fact that you rarely know what’s around the corner.

Although we all have a go at crystal-ball gazing, none of us can predict the future. But given the current environment, taking large risks would be inappropriate and being selective is important.

Having a well-diversified portfolio and one that’s well-structured for inflation, higher interest rates and any other shocks that might be around the corner is always the best approach.

Richard Champion and Tom Becket are co-chief investment officers for Canaccord Genuity Wealth Management