Whilst we’re not quite there yet, given the year that we’ve had I think it’s safe to say I’ll happily celebrate the passing of 2023! And it’s been yet another ‘interesting’ three months.
On 7th October 2023, Hamas fighters launched an incursion into Israel, killing around 1,200 people and taking around 199 hostages. The subsequent actions in Gaza by Israel have, according to the Hamas-run Gaza Health Ministry, killed over 14,000, injured around 35,000 and displaced almost 1.5 million. From a purely financial perspective, the war has had little impact on markets, and, after a short spike, oil prices have actually fallen, due to lower global demand.
There was some good news on the inflation front with UK CPI dropping to 4.7% in October from 6.3% in September. Whilst most sectors showed a reduction in price growth, the biggest contributor to the fall was from gas prices, which were -31% lower than the comparable period the year before. While this is good news, inflation may fall slower going forward as core inflation (excluding energy and food) remains higher at 5.6%. The Bank of England kept interest rates at 5.25% and is unlikely to reduce them until inflation falls closer to its 2% target or the economy deteriorates significantly, neither of which look like happening soon. In fact, economists suggest that the UK will continue to be mired in sluggish or no growth for some time to come.
In the US, inflation continues to fall (currently 3.4%) and the central bank has retained interest rates at 5.25-5.5%. US GDP increased at an annualised rate of 5.2% in the third quarter which is significantly higher than the rest of the year, the jobs market remains robust and consumers are still spending strongly. There are some small indications that interest rate rises are starting to bite at the edges but this barely suggests a mild slowdown, let alone recession. However, consumer spending could come under some pressure in the new year as Covid-era savings have now been spent and wages are under some pressure from higher interest rates.
There is a widespread belief that interest rates, globally, have peaked but that doesn’t mean that rates will start to fall anytime soon. Central banks were rather caught out by the rise in inflation in 2021/22 and so are likely to be overly hawkish rather than risk cutting rates early and having to fight rising inflation again. The key risks, other than geopolitical events, therefore are twofold. Firstly, how much of the previous interest rate rises are still to work through the system and what effect might that have on spending and economic growth? Secondly, will central banks keep interest rates too high for too long and cause a bigger downturn than necessary? On the positive side central banks at least now have the ability to cut interest rates, unlike most of the last fourteen years when rates were at virtually zero. Should the need arise, cuts in interest rates would be a significant boost to economies and markets.
As much as I might be looking forward to getting 2023 out of the way, 2024 does pose some of its own issues. There will be elections in the US and all that will entail with another Trump vs Biden showdown likely. Equally, in the UK, there is likely to be a general election and, if current polls are to be believed, then it could be a significant Labour majority and the first change in government for 14 years (well, a democratically elected change at least). On top of that, there is likely to be ongoing conflict in the Middle East and Ukraine.
Markets
The better outlook for inflation in recent months has led to a positive reaction from markets. In fact, despite all of the negative events and volatility we have witnessed this year, market returns year-to-date are not too bad:
| Asset class | Index | 2023 return to date |
| US equities | S&P 500 | 14.40% |
| European equities | MSCI Europe ex UK | 11.43% |
| UK equities | FTSE All Share | 4.33% |
| Bonds | ICE BoA Global Broad Market | -2.20% |
| Asia equities | MSCI AC Asia ex Japan | -6.54% |
Source: FE Analytics to 6th December 2023, in sterling.
Most investors, quite rightly, don’t invest solely in US or European shares. However, a broad average of mixed asset funds with around 50-60% in shares (IA Mixed Investment 20-60% shares sector) has returned 3.45% so far this year. Whilst this has not quite kept up with inflation or interest rates it is by no means a bad result given what’s happened.
The positive returns from the main developed markets suggests that investors are pricing in a ‘soft landing’ next year. Money markets are also suggesting interest rates could start to come down from mid-2024 onwards. Any changes to this possibly rosy scenario could result in more short-term market volatility.
Climbing the “Wall of worry”
The Wall of worry is an expression which explains financial markets’ tendency to surmount a host of negative factors and keep ascending. After years of experience investing personally and advising clients, you realise that there is always something to worry about. It’s a modern equivalent of “here be dragons”, the tendency in medieval times of putting illustrations of dragons, sea monsters and other mythological creatures on uncharted areas of maps where potential dangers were thought to exist.
It is human nature to worry. In fact, we often worry more about small things that are actually unlikely to affect us greatly than the very large things that almost certainly would (pandemic anyone?). The point with investments is that they are long-term plans; the events that affect markets week by week or year by year make very little difference to the eventual outcome, with the peaks and troughs baked into long-term assumptions. In fact, the markets’ ability to climb this wall of worry reflects investor confidence that these issues will be resolved at some point.
The views expressed are those of the author and are not intended as personal advice. Past performance is not a guide to future returns. The values of any investment can fall as well as rise.