<h2><strong>Global Markets</strong></h2>
Markets remain in a somewhat confused place, by which we mean investors. The turnaround in sentiment has been extraordinary after the falls of October and last month saw a significant amount of upwards momentum for risk assets. A lot of this excitement is based around the sustained falls in inflation and the hope this will bring rate cuts as early as the spring. A soft landing looks as if it may be achievable for the economy and this leaves equity markets close to all-time highs in the US, with some regions seeing new records. So why do we say markets (investors) are confused? Well, it is difficult to reconcile some of the recent extreme optimism with the ongoing concerns around the real economy. Even the mighty US labour market is showing signs of weakening, and many economic indicators are pointing to a slowdown. Of course, this might mean that rate cuts are more likely but as we have written many times before, this will not sustain asset prices at rich valuations if the economic backdrop is deteriorating. Also, it should be noted that ‘core’ inflation (so excluding food and energy) is settling around the 4% level in the US and further progress may be more difficult than that achieved to date.
It has been frustrating being ‘underweight’ US equities this year, especially as much of the performance has come from a handful of stocks that look as if they are propelled by an AI and growth story that might not materialise as fully or quickly as some hope. We have always positioned portfolios in the way we think is right for clients relative to their appetites for risk. If we see a market with expensive valuations against a backdrop of uncertainty and vulnerability, then we will seek to protect clients from the potential falls this can bring. Whether this works in the short term is another matter entirely but we believe this is the right thing to do and to have done.
Next year brings significant challenges for investors. A record number of global citizens take to the polls with key elections in Taiwan, India, the UK (though it could be January 2025) and not least the US. Often the politics don’t matter to markets other than some brief volatility a week or two around the votes themselves, but next year could be different. The US political risk is especially interesting as the uncertainty comes at a time of a troubling fiscal position and perilous government finances. The bond market may yet have something to say about the election and the implications of the policies the successful candidate might try to implement. For 2024 in general, we remain cautious around equity and maintain our focus on those areas we think are best placed to withstand the lagged effects of rate rises. Bonds look a decent bet – again, the emphasis is on quality – they should benefit from rate cuts without the vulnerability that some equities will have to an environment we think could look a lot like recession in many countries. The gold exposure finds itself in a similar position to that of bonds and could be a useful differentiator as a highly uncertain 2024 plays out.
Investors who have remained patient and not been too quick to declare a benign outcome to the rate tightening might well be rewarded next year. We expect more volatility over the course of 2024 and remain convinced that portfolios are currently positioned to best adapt and take advantage of the long-term opportunities we believe will emerge. We do believe in being different if we believe this will result in better outcomes – and we do, still. So, before we get to 2024, it just remains for us to say Merry Christmas.
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<strong>Investment Line is written and edited by Chief Investment Officer Simon Gibson and Investment Strategist Richard Smith and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.</strong>
<strong>All content correct at time of writing.</strong>
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