November was a strong month for equity markets as central banks held interest rates steady. We look back on 2023, recapping the main themes for investors, and forward to what's in store for 2024.
This year has been good for equities. Why is that?
Two key phrases explain equity market performance from the start of this year to the end of November. They are 'artificial intelligence' and 'soft landing', which is when central banks raise interest rates to slow growth without inducing a recession.
News broke about the advent of generative AI in January, and US technology stocks began to improve from then. It came as a bolt out of the blue as the technology was thought to be some way off wide-scale adoption.
At the time, financial markets were worried about inflation and the risk of a global recession. But inflation data showed continual improvement from the 2022 peak, and economic data was better than expected, given high interest rates and losses in real incomes. Gradually, through the year, the market began to accept the possibility of that soft landing.
Stock markets continued to rise until early autumn, when rising bond yields undermined the valuation of technology stocks in particular. After a weak patch from August to October, stock markets staged a strong recovery in November. World developed equity markets rose 9 percent in November, and US tech stocks climbed 11 percent.1 Bond yields fell in November as markets came to believe central banks are close to peak rates.
A strong UK currency, which rose 5 percent in November, took the shine off the FTSE 100, the UK’s large company index.2 Earnings from these companies predominantly come from overseas, so had less value at the higher exchange rate for the pound. To the end of November, world developed equities were up 18 percent in local currency terms but only 11.5 percent in pound sterling terms due to the sterling appreciation.3 This is well above UK large company index performance, with the FTSE 100 so far registering around 5 percent year to date. The UK index does not have many technology companies, so missed out on a key theme of 2023.
So, what are the prospects for a soft landing?
The global economic cycle is definitely at a key juncture. There are a lot of moving parts as we head into 2024.
One – Will underlying inflation continue to fall, removing the need for central banks to raise rates much further? We think it will come down on a global basis but could stay higher for longer in the UK.
Two – Are lower energy costs guaranteed, or could geopolitical risk or oil supply cuts add more pain to the cost of living and the cost of production? This is always a risk, but higher energy prices are not something we expect to see.
Three – Will the labour market continue to support incomes, or will companies shed labour, increasing unemployment? We think skilled labour shortages will keep the labour market firm. As long as consumer demand remains robust, companies will not feel the pressure to shed labour.
Four – We think the savings of “the average” household in the US and UK are strong. Buffers of savings had been stored up well before they were boosted during Covid, and are a long way from depletion.
Five – Will the recovery in trade, business investment, and manufacturing cycles continue? There are signs that the investment cycle is already improving, helped by solid corporate profits and supportive government fiscal policy.4 Trade and manufacturing data should follow suit as these cycles typically move together.
But what about high interest rates? Won’t they harm the economy?
It’s a fair objection. And the housing sector is the number one candidate for weakness. But ultimately housing is only a small part of an economy. And shortages of homes seem to have put a floor even under this sector. Permits to build new homes in the US have been steadily rising from their low point in January this year. And the latest data on housebuilding starts in the UK showed a 33 percent jump on year-ago-levels.5
Very clearly, households will continue to be cautious about their spending patterns into the new year as the cost of living hike continues to have an impact. But our expectation is that global growth should remain relatively positive throughout 2024.
The Nutmeg investor update is also available as a podcast. Listen to this month's update below.
About this update: This update was recorded on 5th December 2023. All figures, unless otherwise stated, relate to the month of November 2023.
4 OECD, Industrial production excluding construction, change over a year ago
5 UK Housebuilding Starts; All England; Department for Local Communities & Local Government; June Quarter.
Source: MacroBond, Nutmeg and Bloomberg.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.