Last year we predicted that the end of 2023 could see a strong rally in risk assets. We felt that the negative post-summer sentiment, which troughed after the October 7th attacks in Israel, was too pessimistic and overly focussed on geopolitical events which posed little risk to the global economy. The underlying fundamentals of declining inflation, a solid US economy, and stable (but flat) economy elsewhere, combined with the prospect of lower interest rates to come was a powerful mix of bullish factors. The market (eventually) woke up and smelled the coffee, with global equities seeing one of the strongest short-term rallies on record, ending last year close to all-time highs in many cases.
The start to this year has seen some nervous price action, with negative price moves in equities in the first few trading sessions. We will not opine on the causes of this very short-term blip after such a strong rally. We continue to see the environment as being supportive of an equity market rally. Equities goes up two-thirds of the time and go down one-third of the time. After such a strong rally in the final months of last year it is to be expected we should have a short-term pull back, which is exactly what we have now. We see this as nothing other than a short-term opportunity to buy.
Looking a little bit further out than recent trading sessions, as we start a new year in financial markets, what do we think 2024 could look like?
For one thing, it’s likely to be a year of major changes in politics. Elections are scheduled in at least 30 major democracies, including the three largest by population: the US, India, and Indonesia. This year close to half of the world’s population will vote in national elections. Joe Biden’s opinion poll ratings are the lowest on record for a sitting president at this stage of an election cycle. The prospect of another Trump presidency is something all investors and markets will likely have to grapple with towards the end of this year.
Politics and bond markets are closely linked, and this will also likely therefore be a factor to consider in 2024. Higher interest rates mean higher debt interest burdens for countries borrowing money to finance fiscal spending. Before and after elections, democratic governments often spend more to bolster support and fulfil promises made during elections. With debt-to-GDP levels already elevated in many countries, bond markets may wake up to this issue in some parts of the world, limiting the room for governments to borrow.
Let’s not forget the economy either. We started 2023 with most economists and market forecasters predicting an imminent recession, with average forecasts for corporate earnings to be down 10-15% in the US. The economy and corporate performance outperformed even the most optimistic forecasts. Today we’re in somewhat the reverse position, with almost all predictions of recession having been jettisoned and ‘soft landing’ becoming the consensus. We continue to believe that we may avoid recession and see a new up-cycle in the economy kicking into gear. We do note, however, that the future is inherently unpredictable and a surprise on the upside to inflation or downside to economic growth data could shake markets back into considering the possibility of a recession. We’ll have to wait and see.
China? We think there are much more interesting emerging market stories elsewhere. India holds the prospect of being the next China, with very high economic growth rates, a growing and young population, and political direction which is increasingly open to foreign investment and supportive of the economy. And India is not alone, South-East Asia, Latin America, West Africa, all have large populations and extraordinary economic potential. The Chinese government has showed over the past five years that there is effectively no rule of law there. They will, if they deem it suits their interests, confiscate assets, in some cases eliminate entire businesses, leaving investors with nothing. We continue to think China should be avoided as an investment destination. There are plenty of exciting opportunities in other emerging markets.
Technology stocks were the leaders of performance for equity markets last year. Will this continue? Yes and no. We think 2024 will be a year of divergence between big tech company performances. While last year was a good year for all big tech names, this year is likely to be challenging for some. Apple’s valuation is very high relative to history, while its growth rate has slowed significantly. Meanwhile Amazon, Meta, and Alphabet trade on multiples below historic averages but are likely to see some acceleration in growth rates this year.
Overall, though, we are excited. We are excited about the future. The innovations coming through across many sectors of the economy, from healthcare, to AI, from green technology to new consumer products and entertainment, offer investors today immense opportunity to have a stake in that future and benefit from the compounding growth effect over time of these radical changes taking effect in the global economy.
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