Finding opportunity in the year ahead

Artificial intelligence

Technology stocks were the star performers during 2023 with the Magnificent Seven – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla – accounting for about 80 per cent of the eventual rise in the S&P 500, propelling the US benchmark index to an all-time high.

However, the benefit to share prices could be seen far wider, as many companies embraced artificial intelligence (AI) to help generate additional services and cost benefits.

Relx, Experian, Prudential and some of the world’s largest healthcare companies are examples of organisations investing further into AI technologies.

And there is no doubt AI will continue to be a much-watched theme this year.

Smaller companies

While some of the largest companies in the world have been the main driver of returns over many years, the opportunity for global smaller companies looks increasingly interesting.

Despite smaller companies outperforming their larger counterparts over the past 25 years, the valuation difference between them has widened, creating an entry point that looks to offer attractive long-term returns for patient investors.

Ultimately, valuations do matter, and this part of the market is often under researched, which creates opportunities, with smaller companies being able to react more quickly, grow more rapidly and potentially become tomorrow’s winners.

Inflation

There is no doubt the downward trajectory of inflation is much welcome, with three of the four components of inflation – energy, food and core goods – being supportive.

However, the largest component – services – is proving trickier.

Services are very much linked with consumer spending (which accounts for 64 per cent and 69 per cent of the UK and US economy, respectively), that in turn is supported by job security, rising real incomes, savings levels, overall wealth and access to debt.

However, discretionary spending by consumers is impacted by living expenses, spending on essentials and taxes.

While the impact of interest rate rises is yet to be fully felt, due to many borrowers being on fixed-rate mortgages, a significant number of UK households will need to re-mortgage this year, which will affect the ability for those consumers to spend at the current rate.

Coupled with a likely uptick in the unemployment rate, as companies seek to cut costs, this is likely to result in a challenging environment for some.

Saying that, some consumers are seeing a boost to their spending ability, with higher interest rates on savings.

The US consumer looks to be in a better position, but the economy is still likely to see an increase in the unemployment rate.

This paints a mixed picture for the outlook around consumer spending, which could lead to inflation remaining slightly higher than anticipated by markets.

• Pictured, from left to right, are Gary Fawcett, branch principal and Chartered wealth manager – investments; Alison Hedley, trainee wealth manager; Jason Ryan, senior investment assistant; James Carrick, Chartered wealth manager – investments; Rob Brotherton, Chartered wealth manager – financial planning; and Michael Rankin, Chartered wealth manager – investments

Interest rates

The outlook for investment markets will continue to be choppy and very much driven by expectations on interest rate cuts this year, on which the market is pricing in around 125 bps of cuts in the US and 50 bps in the UK by the year end.

Whether this will come to fruition will depend on how sticky inflation proves to be.

Both equity markets and longer dated bonds have benefited over the past few months from the likely peak in interest rates in developed economies.

Bond markets could prove more volatile should inflation remain elevated, but even at current levels,

Government bonds offer attractive longer term returns compared with more recent times.

A tailwind for bond markets could be the $7 trillion invested in global money market funds, some of which is likely to find a new home as interest rates start to fall.

Bonds could be a beneficiary.

Elections

2024 will be a busy year for elections, with voters going to the polls in Russia (March), India (April and May), the European Parliament (June), the US (November) and the UK, the latter on a date yet to be confirmed.

However, voters shouldn’t expect many giveaways on either side of the Atlantic, as the coffers are fairly bare, with continued deficits being funded by further bond issuance, but at higher rates.

This vicious circle will make it difficult for large- scale fiscal stimulus over the years ahead.

During 2024, investment markets will need to navigate the negative impact on lower company profits as economies slow, but will be influenced by movements in interest rates as central bankers at home and overseas look to engineer a hopeful soft landing and avoid a recession.

As always, there will be winners and losers, and no doubt too the odd surprise that investors will need to deal with.

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