Inflation – A Dominant Force:

In the UK, we started the year with stubbornly high inflation (Consumer Prices Index – CPI) of around 9%. Although this was lower than the peak, it was only slowly reducing back then and therefore still causing the Bank of England (BOE) to press ahead with its series of interest rate rises. Markets were unsure of how high interest rates would get and how much of a drag this would cause to the UK economy. Consequently, they were in a nervous mood.

As the year progressed the inflation figure did start to reduce more meaningfully, and the latest figure was 4.6% (November release). Although much less than earlier in the year, this was still well above the BOE’s target of 2%. So, while they have not raised interest rates again since early August, the BOE have given no indication of when they may start reducing rates. Markets are therefore still somewhat jittery.

The main UK stock market has been slightly up over the year, driven somewhat by higher commodity prices, but the more domestically facing parts of the market have been down over recession fears, even while the UK economy (Gross Domestic Product – GDP) has continued to grow, albeit sluggishly. Overall, the UK stock market has underperformed many overseas markets this year, which makes it even better value comparatively.

US – Very Resilient:

The US economy has stayed relatively strong in the face of higher inflation, although CPI never got up as high in US as in the UK and it did peak earlier than here. The latest figure was down to 3.2%. This has enabled their economy to continue to add jobs and growth, with their latest annual GDP figure coming in at 5.2%. Subsequently the main US stock index (S&P 500) has been one of the best performing globally.

Far East/Asia – Large Variations:

Stock markets in China and Hong Kong are in negative territory this year, to date. This is not due to a lack of economic growth, but over fears of falling future growth. Inflation data has been very weak (unlike in the West) and jitters continue over their failing property market, amid concern that its woes will spread out into the wider economy.

In contrast, Japan has had one of the best performing stock markets (Nikkei 225) this year. Even though economic growth has been weak in Japan (around 1.3% for 2023) this is nothing unusual for Japan. Also, inflation has been on target, interest rates kept low and employment high, therefore overall Japan has been viewed as less problematic than other major economies. The Indian stock market has also performed well (Nifty 50). This has been down to robust economic growth of around 7.5%, with reasonable levels of inflation (compared to their 4% target).

Europe – Not As Bad As Expected:

Markets expected Europe to be in recession this year and although GDP growth has remained low, it has surprised on the upside. This has been coupled with relatively lower inflation and interest rates compared to the UK. European stock markets have been buoyed by economic data being better than expected, even though it has not actually been that good!

Overall Picture – Gradually Improving:

This year has been seen by global stock markets as one of steady progress in the war against inflation and that has driven highly positive returns in many markets, the UK being one of the exceptions! Although the war in Ukraine has continued unabated, it has not been impacting commodity prices in the way it did last year. In particular, oil and gas prices are way off of their peaks, but so are grain/cooking oil prices. This picture has been a major factor in lowering the inflation figures. As inflation moderated during the year Central Banks put a halt to raising interest rates further and this has also supported markets, by easing recession fears. Stabilising rates have also helped Corporate Bond markets have a better year than last year and kept them in positive territory.

Outlook for 2024:

It is always difficult to make predictions for the future especially when there are high global tensions. However, escalation of wars aside, we can see that the inflation backdrop going into 2024 is much improved compared to the start of 2023. Next year should therefore see a continuing moderation of inflation, even in the UK. This in turn should enable Central Banks to at least start indicating when they may begin cutting rates, if not make any actual cuts. However, any clarity over when rates may start to reduce, would be positive for stock and bond markets.

Although inflation is moderating, it is likely to stay higher than we were used to previously and deposit rates will therefore continue to offer little to no protection against the devaluing effects of inflation.

Sentiment in the US is always a major influence on equity returns and the fundamentals in the US are continuing to improve, going into 2024. Of course, there is the issue of the election coming in November next year, but with the current expected presidential nominations, there should not be too much in the way of shocks to the markets. 

The UK is also likely to see a General Election towards the end of next year. The current leaders of the main parties are not likely to offer any particular concerns to the stock market. The UK is a very undervalued market, compared globally and not keeping up with other markets this year, has made it even better value. This value has not gone unnoticed in the corporate market, where there has been great interest in buying up solid UK companies at ‘discount’ prices, given their stock market valuations. It would not take much UK economic good news for global stock investors to suddenly recognise the value of UK equities, and start buying, hence push up prices. So, while 2023 has been disappointing for UK Equities, 2024 could see a surprise on the upside.

Sources: Bank of England, Office of National Statistics, European Central bank, KPMG, OECD, US Department of Labor, Reuters.

Past Performance is no guarantee of, or guide to future returns.

The value of investments and the income from them can fall as well as rise and you may not get back the original amount you invested.

The comments made in this review represent our current investment views and are in no way a guarantee of future performance.