Our investment team give their views ahead of the new year
As 2023 draws to a close, all eyes are turning to 2024, and people are predicting what could drive market and portfolio performance over the next year. Here, the Nutmeg investment team share the six key themes that we think will be important in 2024. Each theme has the potential to drive markets and the asset allocation of the Nutmeg portfolios – so we'll be keeping them front and centre in our minds over the coming months.
2024 will likely be a pivotal year for the global economy. We should see interest rates peaking, elections on both side of the Atlantic, and the potential for a more certain environment for commodities and equities too, with corporate earnings in the US hopefully consolidating on the back of more solid signs in the third quarter of 2023.
James McManus, chief investment officer
Theme 1: Positive leading indicators for 2024
We as a team spend much of our time looking at leading indicators: measurable data on things such as global trade, manufacturing and investment that may help us to forecast future economic activity, and therefore the health of markets.
A number of indicators show the fixed-capital investment cycle - spending on things needed to start and conduct business, such as buildings and equipment - is turning.
As you can see from Chart 1, this indicator picked up somewhat in 2023 (green line). Because the investment, trade and manufacturing cycles all measure the same global growth dynamic, as the former has picked up we expect the latter measures to follow suit.
Chart 1: Annual growth in world trade, manufacturing, and investment (%)
Source: CPD, Nutmeg, Macrobond
We monitor economic cycles by analysing the global growth dynamic, which is triangulated across manufacturing, investment, and world trade. They don’t all move in the same direction all the time, but they do stay in sync over time. World trade volumes are the current ‘weakest link’ among the three.
It's early days, but solid employment and soundness of private sector balance sheets in the US suggest that the consumer recovery underway and should awaken an improvement in global manufacturing and trade, just as it has already done in business investment.
It's clear that higher interest rates have been a drag on growth, limiting the contribution expected from the home-building sector, for example, as the cost of borrowing rose. Even in the US housing market though, the data has not weakened to the extent many had feared. Another sector, automobiles, is performing better than might have been anticipated because of interest rate hikes. This is due, in part, to the financial health of the private sector.
In any case, we think interest rates are near or have likely passed their peak, so the dampening impact on economic activity should ease during 2024. Central banks are keen to restore their inflation-fighting credentials. However, as inflation hopefully declines in 2024, policymakers will also be anxious not to leave real interest rates (subtracting inflation) too high for too long.
Brad Holland, director of investment strategy
Theme 2: Commodity prices should be less of a concern
We have all felt the financial pain of higher food and energy costs over recent years, with supply shocks related to the Covid pandemic and Russia’s war on Ukraine. Both have impacted the smooth operation of supply chains.
Chart 2 rebases the main categories of commodities to 100 at the end of 2019, before the Covid shock took hold.
Chart 2: Quarterly change in the price of metals, agriculture, and energy, baselined to 100
Source: Bloomberg Commodity Price Indices, Macrobond
The first thing to notice is that energy (oil and gas) prices are below the level at the end of 2019, with the black line under the 100 mark. However, weighted average metal prices (copper, aluminium, zinc, nickel, lead) are almost 25% higher (125-100) while agricultural prices are over 50% higher.
The second thing to note about the chart is that all commodity index levels are well below the panic period following Russia’s attack on Ukraine in February 2022 (grey bar in the chart). Energy prices in particular have been volatile in the interim, but are back to where they were before the onset of hostilities.
It would seem that the supply shocks of recent years have passed, leaving the outlook for 2024 supportive for more stable commodity prices. The IMF has forecast positive global economic GDP growth of 2.9% in 2024, down from its estimate of 3.0% for 2023.
It’s not ‘full steam ahead’ as was experienced in the early 2000s when China was still plugging itself into the global trade system and the world economy was growing around 5%. The West has become more wary of China’s geopolitical motivations and some countries are trimming back industrial cooperation in key sectors. Still, good growth is expected, and without supply chain disruptions, we expect commodity prices will rise.
Yang Yang, investment analyst, performance and risk
Theme 3: Earnings in the US should continue to surprise on the upside
Corporate earnings in the US remain a key metric and support for the ongoing performance of equity markets, serving as a critical barometer that investors closely monitor.
The first two quarters of 2023 revealed a notable downturn in US corporate earnings, with Q1 and Q2 registering overall negative figures of 4% and 6%, respectively (Chart 3).
Surprisingly, despite these negative earnings, equity markets experienced an upward trend during the first half of the year. We can see this in ratios or multiples that signify to investors an increase in market valuations. These include the price-to-earnings multiple, a common way to compare a company's market value (price) with its earnings. However, looking deeper into the data unveils a more nuanced story.
The negative trend in earnings was primarily attributed to the energy sector, which experienced a stark contrast to its boom in 2022, that had been fuelled by soaring commodity prices. Excluding the energy sector paints a considerably more favourable picture of earnings in general.
Encouragingly, the latest reported quarter (Q3) witnessed a substantial improvement, with some sectors even posting positive value.
Chart 3: US corporate equity earnings growth, % change over the quarter
Source: Nutmeg, Macrobond
Forecasts for the upcoming three quarters also give reason for a more optimistic outlook. Contrary to initial concerns at the end of 2022, US corporate earnings have consistently surpassed analysts' expectations, acting as a robust pillar of support for the market.
Corporates, notably in consumer, technology, industrial and financial sectors have delivered returns that were significantly higher than expected in a year that had been expected by many to fall into recession.
Looking ahead to 2024, there is good possibility that US corporates in particular, will continue to outperform consensus growth expectations, contributing to a positive trajectory in general earnings.
Pacome Breton, head of portfolio management
Theme 4: Inflation is coming down... but interest rates cuts may still be someway off
2023 started off with the spotlight on Bank of England monetary policy, with rates having already climbed rapidly from 0.1% in 2020 to 3.5% by December 2022.
Markets were optimistic that inflation would ease quickly, either from a slowdown in the economy or base effects, where year-on-year inflation is expected to reduce naturally as, for example, the effect of the spike in energy prices rolls off.
Needless to say, inflation didn’t roll off as quickly as markets thought and neither the Federal Reserve, the Bank of England, nor the European Central Bank are expected to start cutting rates before late spring 2024.
Chart 4 shows the predicted base interest rates for the next year for the US, UK and eurozone, as predicted by the futures market. Futures are financial instruments used for hedging or for speculative purposes. In short, this gives market prices for future anticipation of interest rates.
Chart 4: Futures implied interest rates
Source: Bloomberg, Macrobond, expectation of future base rates derived from market derivatives
The good news is that the UK Consumer Prices Index at 3.9% (in the 12 months to November 2023) is a lot closer to 2% than its 10.5% peak in December 2022, which suggests that there’s an increased likelihood of these cuts materialising.
However, where there’s been significant movement in the long-end of the yield curve (bonds with a longer maturity of, say, 20 or 30 years, which are most sensitive to interest rate changes), the short end is where we look at for what market views on rates in 2024 are. The short end is suggesting that, although the peak rates are behind us, rate cuts are not likely to be seen until late Spring.
Are we completely out of the woods? It’s not clear yet with high inflation, wage growth and the seemingly ever-present geopolitical risk all likely to influence central bank policy. But for now, what seems fairly reasonable is the assumption of unchanged policy rates until sometime in the spring of 2024 in the UK and it seems to us the most rational viewpoint.
Bola Onifade, portfolio manager
Theme 5: US consumers should come to the rescue (once again)
The health of the US consumer is a theme that continues to dominate investors' thinking when it comes to market predictions. Throughout 2023 there has been much press coverage around the depletion of excess consumer savings, the money that people saved during the pandemic and how this is now being drawn down.
However, we at Nutmeg think this misses the bigger picture and instead focus on overall savings, which present a simpler and clearer picture.
Our calculations indicate that approximately $4 trillion has been saved by American households since the start of the pandemic, resulting in a larger cash buffer for consumers as our colleagues at JPMorgan’s Research Institute have pointed out.
This cushion has been depleted much slower than expected and compared to historic cycles. We believe this is due to two reasons, wages and debt levels. Chart 5 shows the total growth in US household cash over the past four years.
Chart 5: Growth in household cash and equivalents ($trn) 2019-2023
Source: US Federal Reserve, Macrobond,three month rolling average
Wage growth has been broad based and is likely to grow at steady rate given that a tight labour market continues stateside.
Furthermore, US consumers still carry memory of the great recession of 2008. They have not overburdened themselves with debt during the reopening/recovery of the economy, particularly of the floating or resetting rate variety which are much more sensitive to changes in interest rates from the Federal Reserve.
Chart 6: Year-on-year percentage growth in average weekly earnings 2019-2023
Source: Nutmeg, Macrobond, three month rolling average
We believe the US consumer will remain healthy as we proceed into 2024 and has scope to increase spending if needed, especially as inflation returns to more historic norms.
Scott Gardner, investment strategist
Theme 6: Grab your popcorn... or your earplugs. It's election year!
Starting close to home with the UK, the current Conservative government led by Prime Minister, Rishi Sunak, faces an uphill battle to remain in power after the turmoil of 2022.
Current polling (Chart 7) indicates that Labour, lead by Sir Keir Starmer, will be the largest party in the House of Commons. Not much is known yet about either of the two main parties' policies, nor those of the Liberal Democrats and smaller regional-focused parties who might be coalition partners if required.
Chart 7: UK voting intentions, 2022-2023
Source: YouGov, Bloomberg, Macrobond
Stateside, the presidential campaign is already in full swing on the Republican side as candidates jockey in primary elections to likely finish runner up to Donald Trump for the nomination. Barring any legal and constitutional issues, the former president holds a commanding lead over the Republican field in recent polls and is expected to get the nod from grassroot Republicans.
On the other side, President Biden is facing minimal challenge in the Democratic primary as is customary when the sitting president is from said party. The focus will be once again on swing states within the US: Pennsylvania, Ohio, Georgia, Arizona, North Carolina, Wisconsin and Nevada.
Early polling in a head to head from some sources shows the former president leading the current president across six of the seven swing states. PredicIt, a trading market, had Biden leading in the direct head-to-head until recently (Chart 8).
Chart 8: Probability of Biden and Trump winning the US election, %
Source: PredictIt, Macrobond
The key issue for investors is the margin of victory on either side. If the winning party fully controls the Government, which includes the policymaking Senate and House, they'll have full sway to enact their legislative agenda. If power is split between the two parties, with one controlling the House and the other the Senate, we're more likely to experience the status quo or a moderation of the policies of the winning party.
Scott Gardner, investment strategist
We hope that in highlighting these themes, we have given investors food for thought about how the next 12 months may pan out for markets in the shorter term. However, we would still urge investors to take a long-term view, of at least three to five years, when investing. Market volatility is a natural part of the investment landscape, with our team working full-time to manage your portfolios through the ebbs and flows of the market.
Make sure you watch our latest Investor update video for an overview of the events of 2023, and keep an eye on our Nutmegomics blog and other channels as we update you on our thinking throughout the year ahead.
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 simulated past performance are not a reliable indicator of future performance. Forecasts are not a reliable indicator of future performance.