The markets have had a huge impact on private banking and investments in 2023, but will this continue in 2024? Will inflation and geopolitical issue hold out attention over the next twelve months? PBI speaks to the experts

Javier Lendines, general manager, MAPFRE AM

After a horrible 2022 for returns on mutual funds and pension plans for all portfolios, if everything remains the same over the coming days, 2023 will end with very impressive returns.

Although we might see an economic slowdown, we continue to believe that the economy is healthy, the unemployment rate in Europe and the United States is low and, therefore, consumers keep consuming. We have a post-Covid pool of savings that has not yet dropped and, possibly, monetary policy will be somewhat more relaxed next year.

Financial markets are increasingly more complex, which makes the work of analysts more difficult and decision-making more complicated. For example, if you had asked any of us what would happen after a Hamas attack on Israel, we would have thought that the stock market would contract and oil prices would rise. Has that been the case? Not at all. When it comes to forecasts, we have to keep this complexity in mind.

Greg Sichenzia, partner, Sichenzia Ross Ference Carmel (SRFC)

In 2024, interest rates will continue to dominate headlines, but this time because of their stabilisation and decline, which will create a more active IPO and capital markets climate, as well as a big boost to the overall economy.

The resurgence of the IPO market is clear, as activity typically increases when the cost of capital gets cheaper, which ultimately needs to be deployed. In 2024, I expect Stripe will be the company that opens the markets and the floodgates because all of the private venture capital and banking money that’s gone into it over the past few years. If a deal with Stripe materialises, large caps will lead the way for opening up small caps.

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By GlobalData

We’ve already seen big companies performing much better. As I write this, stock markets in mid-December are hitting all-time highs. Right now, we see large cap companies (such as Amazon, Tesla and Google) succeed, and that will start to trickle down to smaller companies in the new year. This is due to investors making money in their portfolios off bigger investments, creating more risk capital available. History tells us when people start feeling more secure in bigger investments, the micro and mid-cap markets thrive.

Further, drops in interest rates also mean home buying will pick up again, which makes many bullish about real estate and broader capital markets.

All of this will result in more lending, which will affect the banking industry. People will be borrowing more money again because the cost of capital comes down. If no one is borrowing money, then they’re not making money. As JFK said, a rising tide lifts all boats.

Overall, we can anticipate that all sectors will improve in the new year. With interest rates and a presidential election year, I forecast a robust stock market and IPO market going into 2024.

Christopher Crawford, portfolio manager, Eric Sturdza Investments’ Strategic Long Short Fund

The impact of rising interest rates will become more apparent in 2024, as leveraged companies face increasing stress. The market will realise that these risks are not fully reflected, leading to potential concerns about the financial stability of these companies.

Despite recent moderation, inflation will continue to put pressure on consumers, particularly those with middle-to lower-incomes. Essentials will consume a larger portion of this population’s spending, undermining their discretionary spending and adding to the difficulty of obtaining affordable loans for big-ticket items like automobiles. Retailers may then struggle to meet sales expectations as a result.

The top-performing stocks in the S&P 500 risks pose a concentration risk in 2024. Such stocks, considered “inflation-proof,” have outperformed the rest of the market to an extreme degree. However, any correction or decline in these stocks could have a significant impact on the overall market due to their large share in the index.

Traditional automobile manufacturers will continue to face challenges in 2024, including consumer stress, higher labour costs from recent strikes, and competition from electric vehicle (EV) companies like Tesla. On the other hand, EV startups are likely to grapple with production delays, increased capital consumption, and supply chain disruptions. Both segments of the industry will need to navigate these obstacles within a challenging macroeconomic environment.

2024 will bring a reckoning for some companies backed by private equity funds due to higher cost of debt and headwinds to operating performance. Devaluations and decreasing returns will expose companies that have not added significant value and put pressure on allocations to private equity. As financing becomes more expensive, the performance of initial public offerings (IPOs) venture-backed companies will also be closely scrutinised.

Charles Ferraz, chief executive officer, Itaú USA Asset Management

Looking ahead to 2024, the US markets remain influenced by interest rates fluctuations, government spending, and potential election-related volatility. Caution is advised for the US equity markets, but emerging market equities should benefit from the scenario.

In Brazil, the markets anticipate potential gains as global interest rates fall, combined with the ongoing local adjustments. With a robust current account, favourable geopolitical positioning, and growing capital markets, Brazil becomes an attractive destination for investments. However, the fiscal deficit continues to be a challenge. Overall, this dynamic sets the stage for optimism in both the stock market and the local currency (BRL).

Tom Hopkins, senior portfolio manager, BRI Wealth Management

2023 has been a period of significant change for the UK, marked by rising inflation, cost-of-living pressures, recession fears, and growing geopolitical tensions to name a few.

Looking to 2024, the road is likely to continue to be bumpy one. Although interest rates starting to level off and inflation trending lower could be paving the way for global equity markets and real asset sectors, like property and infrastructure, to regain strength following two years of market volatility, a number of factors could still derail economies from this path to stability.

For instance, one could question whether equity markets are correctly pricing in significant rate cuts in early-mid-2024. Unless there is a true deterioration in the economy, we struggle to see the argument for central banks to cut rates and therefore we are currently of the view that the ‘higher for longer’ narrative is more likely than markets’ consensus view, which could lead to a repricing in equity markets. For households and businesses, higher interest rates will limit borrowing, increase the cost of capital, and encourage saving. For governments, higher rates will force a reassessment of fiscal outlooks sooner rather than later, which could sour investment sentiment.

Also, major elections and enduring geopolitical tensions tend to cast a dark shadow of uncertainty, obstructing the road to market stability. War in Ukraine and the Middle East is still ongoing, with the potential risk of another oil price shock still on the cards. The outcome of the US presidential election is far from clear cut, with the unexpected rise of former President Trump, currently leading the polls.

We see five key trends playing out next year:

  • UK Small- and Medium-Sized Enterprises – For some time now, the domestic UK market has been unloved by investors and has traded at a significant discount in comparison to peers – with 2023 seeing a further widening of this discount. Should this trend persist in 2024, we could see an increase in takeovers from private equity and foreign buyers as they look to pick up some the UK’s high quality mid- and small-cap businesses at discounted prices – especially now that we’re seeing a stabilisation in the interest rate cycle.
  • US Election – Global markets will be carefully watching the evolution of US election polls in the lead up to November 2024. As the list of candidates narrows, we could see equity markets react swiftly and excessively, particularly if Donald Trump’s popularity score continues on its upward trend.
  • Chinese Stimulus – Given the headwinds and pressures exerted on the Chinese economy over the last 18 months, we expect to see Beijing try to reassert its dominance on the global stage, employing various stimulus measures to help boost the economy, including incentives targeting the property market.
  • UK REIT Recovery – As rates and inflation stabilise, removing much of the uncertainty surrounding the UK property market, we should start to see lower property yields – with many property companies still pushing through rental growth and occupancy remaining very high, particularly in commercial property. We expect to see a recovery and closing of discounts within the UK REIT (Real Estate Investment Trust) market.
  • Economic Growth – We see economic growth across developed markets remaining relatively benign next year, with the expectation of a soft landing or very mild recession in both the UK and the US.

Jeff Brummette, CIO, Oakglen Wealth

The effects of inflation and central banks’ response to curb it, through historic interest rate hikes, will extend into 2024. The normalisation of interest rates, coupled with a surge in sovereign debt post-Covid, poses a considerable challenge for developed countries in the coming years.

Despite a stellar year for technology stocks, especially the ‘Magnificent Seven,’ the NASDAQ 100 is still below its 2021 highs. Interestingly, the FTSE 100 outperformed, driven by the robust performance of energy stocks.

After a 25% pullback in the UK Bloomberg Aggregate Index last year, there is now value in fixed income markets. I prefer the front end of the yield curve, particularly the 3 to 5-year sector, given the observed inversion in 2-year versus 10-year government bond yields.

The challenges faced by the Chinese economy have broader implications for global growth. Some Chinese companies are poised to benefit from the move towards a greener society, with notable advances in electric car manufacturing and solar panels.

While acknowledging the risk of developed economies slipping into recessions, there are still opportunities for investors. Energy, defence, and healthcare are sectors likely to outperform, with an emphasis on companies demonstrating pricing power and low debt levels.

Frédérique Carrier, head of investment strategy, RBC Wealth Management in the British Isles and Asia

Subdued economic growth and troublingly persistent inflation suggest the UK may well fall victim to stagflation in 2024 if the labour market deteriorates further. The Bank of England is unlikely to be willing to cut interest rates before the second half of the year, in our view. Despite the unpalatable macroeconomic backdrop, we see opportunities for patient investors. UK equities are attractively valued, largely unloved, and offer defensive characteristics.

The UK’s challenges continue but its unloved equities offer opportunities.

A changing of the guard? The next UK general election is likely to be held in 2024. Given that the traditionally left-wing Labour Party has consistently held a large lead in the polls for more than a year, it is worth considering how the party would govern once in power.

Under its leader Sir Keir Starmer, Labour has changed its spots. The policies of its radical left-wing faction, such as imposing higher taxes on high earners and nationalising utilities, have been abandoned. The party seems to have transitioned towards the centre and has markedly improved ties with the corporate sector. Overall, we do not think a Labour win would incite a strong negative reaction in financial markets.

Labour also aims for a closer relationship with the EU, including a regulatory alignment of “certain sectors” and accepting some oversight by the European Court of Justice. Labour is also looking to deregulate the planning rules for new homebuilding, strengthen employment rights, and forge ahead with the transition to a low-carbon economy.

Some of these aims may be difficult to achieve, in our view. The EU is unlikely to accept this “cherry picking” approach, and reforms to national planning policy may well continue to meet fierce domestic opposition as they threaten to change the landscape. Importantly, Labour would inherit governorship of a country with deep scars—not only from Brexit but also from the fastest spree of monetary policy tightening by the Bank of England (BoE) in three decades—and one that is heavily indebted with gross debt to GDP approaching 100%. All of this may limit a new government’s ability to reboot the economy.

Economic data, which softened throughout 2023, is likely to slip further as the full impact of much higher interest rates increasingly filters through the economy. We think this will likely be partly offset by an improvement in real wages as inflation has declined. But much depends on the labour market. The risk is that it could weaken should the impact of higher rates exert pressure on corporate profit margins. Unemployment increased from 3.7% in January to 4.3% of late. Overall, a consensus group of economists expects GDP growth of a mere 0.4% in 2024, on par with the level in 2023.

Despite this weak growth outlook, we think the BoE will likely keep the Bank Rate, currently at 5.25%, elevated for much of 2024. Core inflation has waned but remains sticky, at 5.7%.

We see risk of stagflation in the UK, a state characterised by relatively high inflation together with slow economic growth and rising unemployment.

We also acknowledge the challenging domestic economic prospects but continue to recommend a Market Weight position in UK equities. We believe the FTSE 100 Index’s defensive qualities should hold it in good stead given the more volatile backdrop we are expecting for the global economy and global equities in 2024. The UK’s blue-chip equity index, the FTSE 100, has relatively large exposure to defensive sectors (e.g., Health Care and Consumer Staples). Moreover, it has a bias to “old economy” industries, including Energy (approximately 14% of the FTSE 100), a sector where the risk-reward is favourable at present, in our view, given the tight supply-side dynamics, inexpensive valuations, and improving earnings momentum. Importantly, UK equity valuations appear undemanding, with almost every sector trading at an abnormally high discount relative to history.

Given the challenging domestic economic prospects, we remain cautious on companies with UK-centric revenues. We continue to recommend maintaining a bias for globally diverse, high-quality businesses. Across the market, the valuation multiples of many leading UK-listed global companies remain at a notable discount to their international peers listed in other markets. We view this as an unwarranted “UK market discount” on these global companies, and think this presents an opportunity for long-term investors in these stocks.

EUROPE

  • 2024 may be the year when fiscal and structural reform efforts enjoy the greatest impetus.

With the regional economy struggling, the reforms agenda has been given new impetus. Recommendations to improve the effectiveness of the single market are due in the spring; it will be up to the new European Parliament, which will be elected midyear, to implement them. For equities, weakening macro and earnings momentum remain headwinds. We would become more positive when signs that the region’s relative economic growth momentum is improving become apparent.

  • Reforms in focus; we remain cautious until the next economic upcycle.

After the recent sharp weakening in eurozone manufacturing and services activity, stabilisation is possible over the next few months. The Industrials sector needs to rebuild depleted inventories, and consumer confidence could improve now that pricing pressures are abating. Nevertheless, we expect elevated interest rates to increasingly force belt tightening on the corporate sector.

The European Central Bank will likely keep interest rates on hold well into 2024. Though inflation has decelerated sharply to 2.9% and bank lending has waned markedly, wages are still growing at 4% year over year, a level inconsistent with the 2% inflation target. Slightly higher unemployment is likely necessary for wage growth to decelerate further.

Only once rates are cut can a sustainable economic recovery take hold. A consensus group of economists expects real GDP growth of 0.7% in 2024, marginally up from 2023’s 0.5% estimate. The potential for a muted recovery is due to the region’s increasing lack of competitiveness and the reining in of fiscal stimulus.

The pandemic and the war in Ukraine have compounded the bloc’s long-standing structural issues such as its heavy regulatory burden, and the lack of cooperation among EU innovators and companies. These issues conspire to undermine the effectiveness of the EU single market, in theory a seamless amalgamation of 27 national markets with 450 million people.

In her 2023 September State of the Union speech, European Commission President Ursula von der Leyen identified competitiveness as a key priority. Task force recommendations are due in March 2024. The challenge is to preserve the freedoms of movement of capital, goods, and services while competing with the U.S. and China.

Following the June 2024 European Parliamentary elections, it will fall on the next European Commission to implement any recommendations to improve competitiveness and the state of the internal market. The buy-in of national governments will be an important test of their commitment to improve competitiveness.

Moreover, previous EU rules limiting national budget deficits and indebtedness were suspended over the past three years. This was to facilitate financial support for the corporate sector from Brussels and national governments. Financial aid was aimed at supporting the economy reeling from the pandemic and the war, and at accelerating the green transition for domestic reasons and as a response to both the U.S. Inflation Reduction Act subsidies and China’s generous support of its industries.

Discussions to reform the fiscal rules have been ongoing as there is a broad consensus within the EU that more fiscal flexibility is required. Those discussions are likely to drag into 2024. We believe the rules will eventually be watered down though they will likely still require some fiscal tightening for most countries.

Emma Wall, head of investment analysis and research, Hargreaves Lansdown

2024 is not going to be a year of rapid or sustained economic growth. Market consensus in recent weeks seems to have shrugged off recession fears and is pricing in a Goldilocks scenario, where central bankers cut interest rates but not because they are forced too by an economic hard landing. We aren’t quite as optimistic. Countries and corporates that have loaded up on debt in an era of zero rates will struggle to meet borrowing costs. Any economic wobble will hit tech and growth stocks hardest, and hot money will flow to lower risk assets.

Domestic economy is under pressure – but the market is cheap

As for most developed markets, the growth outlook for the UK is underwhelming, with GDP expected to grow by 0.6% next year, with a lingering risk of recession. Inflation is likely to trend lower but remain elevated, versus both the US and Bank of England target for some time.

But good news for investors – this bad news is priced into the market. The UK stock market has traded on a discount to its international peers for a number of years – first Brexit, then a lack of tech stocks, and a political maelstrom have made the US more attractive on a relative basis. But we believe there are some great companies in the domestic market being unfairly discounted.

And while volatility is likely to continue through 2024, on a long-term view this could be a great opportunity to pick up cheap stocks with international revenues, attractive dividends, good dividend cover and robust balance sheets.

Bonds are no longer boring

We appear to be the only ones, but we’re listening to the forward guidance of central bankers when they say this is a pause not pivot, and rates are likely to stay higher for longer. We therefore expect no imminent big downwards movement in bond yields but see scope for lower yields (and higher prices) further out, with higher volatility along the way.

Investors should not be put off by this outlook – we think this could the most interesting entry point for bond investors in decades.  There is potential that you are either rewarded with income – from higher-for-longer yields – or growth, as yields fall. Volatility is hard to stomach but can offer opportunities for good quality active fund managers to take advantage of price fluctuations.

We think high quality corporate bonds offer an attractive yield premium over government bonds. However, this premium is less than you expect to see in a recession – so we see downside if the economic outlook deteriorates as you are not being adequately compensated for that risk.

The US is expensive, and emerging markets overlooked

For equities, growing corporate earnings will be challenging. Slow economic growth and still high inflation mean lower margins. However, valuations are below average in most global markets and offer upside for long-term investors.

Many Asian and emerging market companies are trading at a significant discount compared to their developed market counterparts. China, in particular, is a beaten-up region we think is worth looking at despite the negative headlines. While there are clearly question marks over some sectors such as property, looking ahead over the next five to 10 years, this presents an attractive entry point for investing in China.

On the flipside, valuations in the US look close to fair value when compared to their history. The top 10 constituents of the S&P 500 are trading at significant higher valuations compared to the rest of the market. We therefore don’t consider the US to be the most compelling market to buy going into 2024. Every portfolio should have a good allocation to the US, but we encourage investors to diversify their risks to include other styles, sectors and countries. While recession risks can sometimes create a buying opportunity for contrarian investors, we think the macroeconomic headwinds in Europe are just too tough to justify investing new money in the region this year – though as with all major economies it has its place in a diversified portfolio.

We are not bullish on Japan either – though for different reasons. Lower interest rates than in the rest of the developed world should boost the attraction of equities and prove a tailwind for the market, and there are interesting governance reforms in the region. But the weakness of the yen has dragged on performance for UK investors, and we expect this to continue.

Geopolitics impact commodities

The Israel-Hamas war has had a devastating impact in the Middle East. It has also had a global market impact, pushing up the price of both gold and oil amongst other commodities.

The perceived safe haven of gold offers protection against inflation over the long term, by sustaining its purchasing power, but is a poor hedge against shorter term price rises. We think it is expensive at these levels, but it is likely to remain so due to record peacetime government debt levels and heightened geopolitical tensions. In 1973, a war between Israel and its neighbours led to a crisis which saw the price of oil quadruple within a year. Investors should expect higher oil prices for the foreseeable future.”

Tom Brown, managing director, real estate, Ingenious

As interest rate increases continue to bite and the costs and challenges of property development, especially in London, remain high, we expect to see a continuation of the market trends we have seen in 2023 going into the New Year. It’s reassuring to note that as we enter 2024, there is a noticeably more stable outlook for inflation compared to what we were faced with at the beginning of 2023.

Buy-to-let market

Whilst buy-to-let (BTL) investors are benefitting from double digit increases in rents across the UK, the costs to many private landlords from higher interest rates and the increased tax burden, means we expect many private investors will continue to exit the market which will further reduce the supply of rental stock. Looking forward, the landscape of the UK residential rental market continues to shift towards purpose-built accommodation owned and managed by financial institutions. Large pension funds and insurance companies are taking the lead here and will increasingly dominate the larger developments with significant financing opportunities arising in the mid-market development space.

Support for first time buyers

First time buyers are crucial to the health of the wider market, the economy and support our way of life here in the UK. This crucial cohort of potential buyers are currently faced with increasingly expensive mortgages requiring high deposits or the challenges and costs associated with renting. The government should look closely at how they can carefully intervene in this area to allow first time buyers access to the market in a way that does not unduly inflate property prices and provides good value for taxpayers.   

Residential prices holding firm

The UK continues to face a shortage of housing infrastructure, which will continue to support property prices despite the higher costs of borrowing. Widespread predictions of a noticeable decline in residential prices linked to higher borrowing rates seem to have been overstated. Indeed, there are noticeable factors that are applying the break to price falls. With residential rents experiencing a year-on-year increase of approximately 12%, there is both the opportunity and liquidity within the Build to Rent, Private Rented (PRS), Purpose-Built Student Accommodation (PBSA), and Co-Living spaces. We are firmly focused on serving the needs of developers operating in those sectors alongside those operating in the Build to Sell market.

Impact of a potential change of government

Housing remains a fundamental political issue here in the UK and ranks highly on the list of concerns for voters up and down the country. As such, it is imperative for every political party, regardless of its affiliation, to include comprehensive policies addressing the core issues of supply and affordability in their manifesto commitments. We don’t expect to see a significantly different approach should a change of national government take place during 2024. Many of the issues on the ground relate to local planning policies and decisions which continues to be a big challenge for developers to navigate. The position on the ground locally seems unlikely to be radically altered by a change in national politics.     

Market outlook

The New Year will bring with it a new and exciting set of challenges and opportunities for growth and progression in what we do. We are looking forward to continuing to work with borrowers and investors and delivering for them. The dynamic landscape of the markets that we serve, and the wider economy requires us to evolve to stay relevant in addressing diverse challenges including the climate crisis, and changes in the way we are all living. 2024 will see Ingenious broaden the reach of our widely embraced development lending product. This expansion aims to offer extended terms for stabilisation to specialised developers within the rental sectors. Additionally, special lending terms will be introduced for developers with a specific focus on minimising embedded carbon in their construction practices.

 Nelson Wooton, Co-Founder and CEO, SaaScada

For many HNWIs 2024 will be the first time they have invested during a period of high interest rates. Cash can now deliver returns which, until recently, could only have been delivered through riskier investment choices. In a volatile economic climate, the ‘safe haven’ of cash can be quite appealing – particularly for those nearing retirement. 

Next year, experienced wealth management firms will need to focus on helping balance risk versus return to help clients maximise their investment potential and beat inflation. But to achieve this, firms must demonstrate a strong understanding of a client’s risk appetite, their long and short term investment goals, and also deliver granular reporting to track returns against stated goals. To pull ahead of the pack and differentiate their offering to clients, wealth management firms must harness the latest core banking technology. This will give them the infrastructure they need to provide bespoke reporting on everything from returns to ESG impact so they can meet individual needs and build trust.

Charlie Huggins, manager of the Quality Share Portfolio, Wealth Club

The outlook for the UK (and indeed global) economy heading into 2024 is highly uncertain.

The good news is that inflation appears to be moderating. This means interest rates have likely peaked and it is a question of if, not when, they will be cut. The goldilocks scenario is that the economy weakens enough to allow interest rates to be cut gradually, but not too much to necessitate more drastic action. A so-called soft landing and arguably the most likely outcome, given the UK economy has held up better than many expected so far.

But a hard landing for the UK economy certainly can’t be ruled out. The worry is that the pain of rapidly increasing interest rates hasn’t yet been fully felt. This is because many companies and consumers will have yet to refinance their debts. So even with inflation moderating and even if interest rates have peaked, the UK economy could weaken significantly in 2024.

A third possibility is that inflation remains sticky in 2024, meaning interest rates must remain higher for longer. This has scope to cause stagflation – high inflation and a weak economy, bad news for everyone except maybe oil companies. While inflation seems to be coming down, the UK is subject to global forces, whether that be oil prices, geo-political tensions, or exchange rates. So although this currently seems like the least likely scenario, it certainly can’t be ruled out.  

Time will tell. But one’s things for sure – it’s far too early for the government and Bank of England to declare victory.