As we enter a new year, we highlight some of the key factors that are likely to determine market direction over coming months, and provide our outlook for the main asset classes during 2024.
Macro view
We expect global growth to slow during 2024, after stronger than expected growth during 2023. As inflation continues to fall away over the first half of the year, restrictive central bank policy is 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.
Market sentiment is likely to be dominated by the pace and timing of interest rate reductions. 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, may well have hiked rates too far, 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.
Asset class outlook
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. The 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 inflation and other key economic data will be keenly watched by market participants.
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 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. Other alternative investments, such as infrastructure, may see improved conditions during this year as the high interest rate headwinds subside.
CDI Portfolio Review
Our CDI portfolios produced strong returns across the board in 2023, and we feel 2024 offers good opportunities for outperformance. The changing conditions may well see consistent active fund managers perform better, after a year where passive funds proved difficult to beat. Our CDI portfolios are blended to capture the broad exposure and value offered by passive investments, and the ability of active managers to provide additional returns.
Our Investment Committee continue to actively monitor economic data, and the regular meetings with leading fund managers, coupled with our disciplined approach to fund selection, will remain the pillars of our investment process during 2024. This process will continue to provide the analysis upon which our CDI portfolios are constructed.
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. Our range of CDI portfolios provide a range of risk rated models, together with two socially responsible model portfolios. Speak to one of our advisers to discuss your existing investment strategy and whether any changes would be appropriate.