Much of the rally over the last two months of 2023 was predicated on market expectations that interest rate cuts will begin earlier than expected in 2024. Some economists have suggested the first cut by the Federal Reserve could come as early as March; however, this could prove to be a little optimistic, and we are mindful that markets could be prone to disappointment if the anticipated cuts are delayed. The last Federal Reserve meeting of 2023 indicated that there may be three 0.25% base rate cuts in the US during 2024, and further cuts to follow in 2025 as the global economy slows.
We expect a similar story of rate cuts in the UK. The Bank of England, who were slow to begin raising interest rates as inflationary pressure began to build towards the end of 2021, may well have hiked base rates above what is necessary to cool inflation, and given our expectations for growth and outlook for the UK economy, we anticipate the Bank of England will be cutting rates, potentially aggressively, in the second half of 2024.
The end of the hiking cycle will provide some respite for mortgage borrowers, although the housing market is likely to remain under pressure. Falling interest rates will also change the outlook for cash savings, which have been attractive compared to other assets over the last year. We have already seen longer term fixed savings rates begin to taper, and this trend should continue during 2024.
We expect global growth to slow during 2024. Growth was stronger than anticipated in 2023, despite concerns over the financial strength of US banks in the Spring and ongoing monetary tightening by central banks. As inflation continues to fall away over the first half of the year, the restrictive policies are likely to lead to more muted growth in the US and global economy. Whilst the US may manage to avoid a recession in 2024, the same fate is less likely for the UK, where growth has been negligible for much of the last 12 months and indeed, October 2023 saw the UK economy contract by 0.3%.
Investors need to be alert to a number of potential geopolitical risks in 2024. The conflict between Israel and Gaza could spill over into a broader Middle Eastern conflict, which would have an unwelcome effect on Oil prices. Investors would be wise not to ignore the ongoing war in Ukraine, although much of the economic impact of the conflict was felt last year. Any increase in tension between China and the US over Taiwan would be viewed negatively by risk assets, and lead to a flight to safety.
2024 will be a big year for elections, with a UK General Election forecast to be any time between May and December, and the US Presidential election in November. The outcome of the UK elections are likely to have a lower impact on market sentiment, and a clean outcome from the US election in November would also be well received by markets. A constitutional crisis, similar to that seen four years ago after the disputed Biden-Trump election of 2020, would not be good news and may see volatility spike sharply higher.
After a very strong final few weeks of 2023, we would not be surprised to see markets take a pause for breath in the first quarter of this year. A broad based rally in both Equities and Bonds since November has undoubtedly priced in some of the potential that monetary loosening could bring in 2024. It also means that some vulnerability now exists should central banks not deliver the expected rate cuts, and markets will remain keenly focused on key economic data as the year progresses.
In the battle of growth versus value, stocks that display strong growth potential – particularly large cap US technology stocks – clearly dominated 2023. This trend may continue in the short term, but this leaves interesting opportunities in more value orientated stocks, who have been largely ignored for much of the last 12 months.
Careful geographic allocation may well prove pivotal in the coming year, as economic performance diverges. We remain positive on the prospects for US Equities, and also favour Japan and the wider Asia-Pacific region. UK and European markets appear to offer relatively good value, but given that we anticipate weaker growth from this region over the coming year, we would prefer to keep allocations relatively light.
After a dismal year in 2022, Bond markets produced a better performance last year and we expect this to continue through 2024. Markets may, however, have moved a little ahead of themselves given the strong rally seen over the last few weeks and there may well be some consolidation during the early stages of the year. Yields look attractive, although we prefer investment grade to high yield debt, given that growth will slow and the higher cost of debt servicing and tight lending conditions could see default rates rise.
Commercial Property produced very disappointing returns in 2023, and although the landscape should improve over time, continued low occupancy of office space and a tough retail environment are factors that keep us away from the property sector for the time being. Other alternative investments, such as infrastructure, may see improved conditions during this year as the high interest rate headwinds subside.
As we enter a new year, we feel this is an ideal time to review existing portfolios to ensure that they remain appropriately invested for the year ahead. Uncertainty continues, and therefore holding a diversified portfolio will remain as important as ever as we navigate 2024. Speak to one of our experienced advisers to discuss your existing portfolio strategy.
