Market Update 15th January 2024

Around the World

Hopefully 2024 will be the year when inflation is brought under control and central banks cut rates. It is also the year when around half of the world’s population will vote in government elections.  This presents huge geopolitical risks which can and will impact markets. There is no guarantee how markets will react to geopolitical news or events, but some volatility is to be expected.

Taiwan voted over the weekend for Lai Ching-te from the Democratic Progressive Party to win the presidency. This is the third consecutive win for the party and is seemingly being used as a representation of Taiwan’s desire to remain politically independent from China. The outcome of the election is likely to increase tensions in the Taiwan Strait, and may lead to difficult US-China relations during the year. Taiwan is of significant importance for tech stocks globally, including some of the Magnificent-7, and although it is predicted China will increase sanctions on Taiwan or increase military drills, no country wants a conflict to escalate, including China.

The US election has been highlighted as one of the biggest geopolitical risks of 2024. The political system means the election hangs on a few swing states, and will likely increase division within the country. Current US President Joe Biden would be the oldest president to finish his second term if he wins, and the same can be said of the former president, Donald Trump, who faces numerous criminal charges, most of which relate to his first term in office. In the run up to the election, it will be an interesting time for markets.

AI will play a part in geopolitics this year. Last year there were significant innovations in generative AI, and with Chat GPT-5 set to come out this year, there looks to be no signs of advancements slowing yet. The use of AI is growing across almost all aspects of our lives, including healthcare, education, public safety and financial services. However, governance has not kept up with developments and the gap may increase.

War continues to have a heavy impact, with Russia unwilling to slow down its war efforts within Ukraine, and Israel continuing its campaign against Hamas in Palestine. Ukraine is struggling defensively coming into 2024. US Republicans oppose sending more aid and even if the Democrats win the election, there will most likely be a reduction in assistance the US can offer. European countries will find it difficult to fill the gap and this may increase the chances of a partition within Ukraine.

Last week the US Securities and Exchange Commission approved, for the first time, ETFs that invest directly in Bitcoin. Issuers such as Blackrock, Invesco and Fidelity were among those approved. This comes over 10 years after the first application for a crypto vehicle was submitted. The approval of the ETFs will make it easier for retail investors to invest, but that doesn’t mean there will be a rush for crypto or bitcoin. The chair of the US SEC stated “While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin.” There have been mixed opinions on the back of the approval, with many worried the unregulated and murky crypto market will now be able to be marketed to retail investors with whom it may not be appropriate.

In the last quarter of 2023, the Technology Working Group of HM Treasury’s Asset Management Taskforce greenlighted UK authorised funds to tokenise their assets. Essentially, this means funds can offer tokenised units or shares which can be traded and recorded on distributed ledger technology (DLT). The taskforce hopes this move is a step forward in order to harness technologies such as blockchain and DLT. This will lead to operational efficiencies, particularly in some back-office functions, and will lay a foundation for future innovation.

Inflation over the past two years has been tricky for markets. The structure and strategy of portfolios, for example equity-bond correlations, has been challenged. With inflation coming down and the potential for rate cuts it seems as though markets might shift their focus to the geopolitical events of the year. However, the reaction of markets is unpredictable, for example on the day Russia invaded Ukraine, although it had an impact on energy markets, the S&P 500 actually went up. And with the Brexit referendum, the UK market came down immediately but mostly regained any loss within months.

Unpredictability can lead to market volatility, but for long term investors, volatility is often a poor definition of risk. The real risk for long term investors is permanent loss of capital, and short-term volatility can lead to major opportunities.

Emily Cave

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