Market Update 8th January 2024

2024: year of the..?

2023 was generally a good year for equities. It might not have felt like it, but it was. The S&P returned 26% on a total return basis, and Europe was up double digits too. Even the much-maligned UK index delivered 8%.

This is despite the latest UK retail flows being negative to the best part of £12bn in the 10 months to the end of October. The number of new funds launching is also very depressed… And depressing. To explain that, please allow me a little rant.

When money flows into the market (provided there is an uptick in new issues and IPOs as well as secondary trading) there will be more money for new projects. Sure, they aren’t always things that come under the ‘social good’ banner, but they could include potential solutions to the energy crisis, or breakthroughs in biotech and medical research. Such projects will need to be attractive and viable for investors because we’re still talking about market-driven capitalism. It’s not a perfect system, but if we compare the overall impact of investing in equity and bond markets to crypto punting, it’s chalk and cheese. It’s hard to see how crypto cures cancer. There aren’t really even any associated effects on job creation or GDP. That’s another reason it would be nice to see some positive flows and an uptick in fundraising in 2024. Rant over.

January is the time for market predictions. I therefore dutifully offer some thoughts… but only with the caveat that predictions are a mug’s game really. Especially ones that involve multiple legs. Take the Brexit vote. To predict the outcome of the referendum correctly was challenging enough, but to get the knock-on effects on the currency and stock markets spot on was next to impossible.

But as I say, tis’ the season for looking ahead. So let’s start with the big picture. We know that from a policy rate and inflation perspective, 2024 will be very different to 2023. Inflation is receding and a succession of rate cuts is likely. That is clearly good news for almost all asset classes – but we shouldn’t forget that the reason cuts are needed is because we need to breathe new life into the economy.

In the bond market, yields have come back in anticipation of the rate cuts, but thankfully we are still nowhere near the terrifyingly low yields of the post-crisis era. Fixed interest remains distinctly more investable than at almost any time in the 2010s.

Within equities, the tech sector has been the place to be in ’23. Its importance to the market meant that led to an easy ride for a whole wave of passive money. I think it’ll become more of a stock picker’s market in 2024.

Most of the tech businesses that make up the magnificent 7 are magnificent businesses. Just see their earnings and cash flow momentum. It’s hard to bet against such quality over the long term, but the recent share price growth has pushed valuation to more demanding levels. And analysts are still pricing in more good news. In the 100 days to 4 January, there have been 300 positive notes on the magnificent 7, and just 13 bearish ones.

The dynamic is very different in other areas of the market. For example, high quality defensives are noticeably unloved. Timing these things is difficult, but I can see a situation where many of the mid-2010s bond proxy winners return to favour. We’ve already seen some consumer discretionary and industrial stocks struggle, and margins could come under more pressure if the macro lags. It would stand to reason stocks with more dependable revenues that have de-rated amid rising rates and the rotation to higher growth areas could become more appealing again.

The advantage of these businesses is they also have the benefit of being good private client investments over the long term. Recurring revenues, solid margins and proven business models are common in the utility, healthcare and consumer goods spaces. Many of these companies have outstanding dividend track records too, so clients can be paid to wait for a re-rating upwards. They might be boring, but in 2024, boring might be best.

George Salmon – Senior Investment Analyst

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