Investment outlook 2024

What could investors expect in 2024?

• 2023 in review

  Jason Roberts, Senior Investment Writer

  Looking back at 2023, it’s been a period of drift for global stock markets. A surprise rally in November brought the US’s flagship S&P 500 index close to its July high, however, it’s been a period of sideways moving markets, with little to buoy investor sentiment.

  Many investors hamstrung by uncertainty alongside the promise of stock market recovery adopted a barbell approach – either choosing the perceived safety of money market funds that invest in cash, cash equivalents, and high quality short-term government debt, or piling on more risk and opting for a technology fund.

  We saw the cost-of-living crisis continue to loom over us all and inflation, while falling, is still higher than we’d all want. And most importantly, we’ve faced even greater global uncertainty from the terrible atrocities ongoing in Gaza and Ukraine.

  For now, the jury is still out on whether next year turns out to be a year of recession or whether there’s more of a soft landing for the economy. This uncertainty/murky outlook, may make people question the point in investing. Why take the extra risk when interest rates have recovered to what feels like reasonable levels once again? Here’s why.

  It’s been 15 years since the Lehman Brothers collapse – part of the reason for the FTSE 100’s worst year on record back in 2008. It was one of the most memorable moments in the global financial crisis. And the following two months would go on to include seven of the 10 worst days on the UK stock market over the last 20 years.

  Then, and many more times since, you could list reasons not to start investing, or to have packed it all in and held your money in cash. But you would have missed out.

  If you invested £10,000 in a FTSE All-Share tracker the Friday before Lehman went bust, it would be worth £25,583.54 at close on 20 November 2023. That assumes no investment charges (which of course there would be in reality and these would impact returns) and that you reinvested dividends.

  Impact of missing the 10 best days on the stock market since Lehman's collapse

  Past performance is not a guide to future returns. Inflation will affect the spending power of money.

  Source: Refinitiv Eikon DataStream correct as at 21/11/2023.

  And the longer you invest for, the better your chances of outperforming cash. Looking back further, there’s over 100 years of data showing that for 91% of ten-year periods, investing in shares has done better than holding cash. That includes times when interest rates were much higher than they are today.

  Our view is, today is always the right time to invest, provided you can look forward long enough. It’s rarely plain sailing and investors will have to ride out the inevitable bumps and flat moments. That is why we say people should invest for at least five years.

  As investors we need to look forward. To be optimistic the future will bring with it growth. And often we need to be resilient.

  Of course, there are no guarantees that we’ll see the same returns in the future. Unlike cash, investments rise and fall in value and you could get back less than you put in.

  So what could the future hold?

  Our experts have looked at their specialist areas to give a view on the prospects for the year ahead.

  It’s important not to focus or try and pick the one with the best potential. Nobody has a crystal ball. And nobody can tell you, with absolute certainty, where the stock market will be this time next week, let alone next year. History rarely repeats itself, but it often rhymes.

  This isn’t personal advice or a recommendation to invest and remember all investments can fall as well as rise in value – you could get back less than you invest. Past performance is not a guide to future returns. If you’re not sure an investment is right for you, please seek advice.

  Information correct as at 21 November 2023 unless otherwise stated.

• Outlook 2024 in summary

  Robert Farago, Head of Strategic Asset Allocation

  The bad news? Global growth is likely to stay subdued as today’s higher interest rates weigh on activity. The good news? All this doom and gloom means opportunities, with both share and bond markets offering potential growth for long-term investors.

  Slow growth and lower inflation

  It is not new news that economic growth was below trend in 2023 and is likely to remain so next year. The increased cost of borrowing will weigh on governments, consumers and companies.

  Here in the UK we expect inflation to come down but to stay above the Bank of England’s 2% target. Because of this, we expect the Bank to keep interest rates at or near to current levels throughout the year ahead – while lower inflation in the US and Europe means we expect their central banks to cut rates late next year.

  Bond yields close to peak levels

  This lack of central banker activity means we expect no big downwards movement in bond yields next year but see scope for lower yields (and higher prices) further out, with higher volatility – more ups and downs in price – along the way. Investors should not be put off by this outlook as we think this could be the most interesting time to start investing in bonds in decades. There’s potential that you’re either rewarded with income – from higher-for-longer yields – or growth, as yields fall, though there are no guarantees. Price fluctuations are hard to stomach but can offer opportunities for good quality active fund managers who can take advantage of them.

  We think high quality corporate bonds – bonds issued by companies – 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.

  Shares offer value outside the US

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

  China in particular is an undervalued region we think is worth looking at despite the negative headlines.

  The US market is the exception, with valuations towards the top end of its historical range. Seven large technology companies led returns in 2023. Analysts expect them to benefit from accelerating spending on artificial intelligence. We encourage investors to diversify their portfolios to make sure they include other styles, sectors and countries.

  We’re not confident on Japan either – though for different reasons. Lower interest rates than in the rest of the developed world should make shares look attractive and prove a tailwind for the market. But the weakness of the yen has dragged on performance for UK investors and we expect this to continue.

  Risk of recession

  The key risk is recessions in developed market economies, after two years of increasing borrowing costs. This would hit earnings and lead to increasing stress for corporate bondholders. Government bonds offer the potential for growth in a severe downturn.

  While recession risks can sometimes create a buying opportunity for investors who take an opposite view, we think the macroeconomic headwinds in Europe are just too tough to justify investing new money there this year – though as with all major areas of the world, it has its place in a diversified portfolio.

  Commodities and geopolitics

  The Israel-Hamas war has had a devastating impact creating countless victims and fatalities both in the Middle East and beyond. 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 shelter 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.

  Plenty of politics

  In 2024, 76 countries are holding elections, including the US and (probably) the UK. If elected, Donald Trump is contemplating increasing trade tariffs and withdrawing from NATO – adding uncertainty for investors.

  By contrast, we see less room for surprises in the UK as high government borrowing costs limit the room for manoeuvre for policy makers.

Areas in focus: sector outlook

The experts in our fund research team have provided their take on what could come next for these key areas that could be vital in many investors’ portfolios.

• United Kingdom

  Joseph Hill, Senior Investment Analyst

  The UK heads into 2024 following a more resilient than expected 2023 amid an interest rate rising cycle pushing rates to the highest levels in 15 years. A weakening labour market, easing wage growth and a housing market slowdown are all signs though that elevated rates are taking effect.

  The growth outlook for 2024 is underwhelming, with GDP expected to grow by 0.6%, with a lingering risk of recession.

  The UK stock market has traded on a discount to its international peers for a number of years. It could be argued there’s some justification here, following a tumultuous period of political instability marked by a merry-go-round of prime ministers.

  But it’s worth reminding ourselves that a country’s economy and its stock market are very different beasts. The largest 100 companies listed in the UK, earn around 80% of their revenues selling their goods and services around the globe. Even the more domestically focused companies in the FTSE 250 earn 57% of their revenues overseas. This means that these companies aren’t just reliant on the health of the UK economy to thrive.

  The UK’s heritage as a leading income market is well established with lots of businesses boasting impressive records of growing dividends over the long term. It’s currently one of the highest-yielding equity markets, at around 4%, making it an attractive proposition for income, though yields are variable and not a reliable indicator of future income.

  There is a pretty good valuation argument for investing in the UK, while investing in dividend paying companies means your income and capital can grow as the companies grow. Any income can be paid out to you as cash or reinvested to help boost long-term growth. Income can be an important component of total returns and is why the Artemis Income fund features as one of our five funds to watch for 2024. As always, investments and any income they produce can fall as well as rise in value, so investors could lose money.

  More about Artemis Income, including charges

  View Artemis Income Key Information Document

  Search for funds on our Wealth Shortlist

• United States

  Aidan Moyle, Investment Analyst

  The US Federal Reserve (Fed) has raised interest rates to their highest level since 2001 in order to combat inflation. It can only be expected that this level of monetary tightening could cause some slowdown in economic growth over the coming years. With inflation falling and a US jobs market starting to weaken, all eyes are on the Fed. The longer they keep rates higher the quicker inflation could fall but if left for too long economic growth could stutter.

  For the most part, valuations in the US look close to fair value when compared to their history. We therefore don’t consider the US to be the most compelling market to buy going into 2024. The top 10 constituents of the S&P 500 are trading at significantly higher valuations compared to the rest of the market. This includes the so called ‘magnificent seven’ stocks which have led the market for much of 2023. They are seen as some of the key beneficiaries of advancements in ‘AI’. With the valuation gap between them and the rest of the market, some fund managers have been using this as an opportunity to bank some profits.

  Investors should expect volatility. Not least approaching November 2024 – which is a date for every investor’s diary with an impending US presidential election. Pollsters expect that despite his legal troubles, ex-president and Republican Donald Trump will stand off against current Democrat president Joe Biden. At a time where US global leadership is under the microscope, this election will be one of the most hotly anticipated ever.

  Search for funds on our Wealth Shortlist

• Asia and emerging markets

  Henry Ince, Investment Analyst

  The economic outlook for Asia and emerging markets shines brightly, particularly in contrast to developed economies. In the coming year, the International Monetary Fund anticipates a substantial 4% GDP growth for emerging economies, which is over double the projections for advanced economies, which include influential players like the US, Germany, and the UK. Emerging market companies are also expected to produce superior earnings growth next year following a tougher 2023.

  Factors such as expanding populations, the rise of the middle class, and increasing urbanisation rates are among the structural tailwinds creating promising investment opportunities. ‘Nearshoring’ – setting up manufacturing or business in a nearby country or close to the end customer – is another theme to watch as companies, prompted by the disruptions of Covid-19, reassess their supply chain strategies.

  The inflation backdrop is also quite encouraging with the swift action of central banks generally keeping inflation levels across many emerging markets in check.

  From a valuation perspective, many Asian and emerging market companies are trading at a significant discount compared to their developed market counterparts, especially in the US. Although the extent varies by country, China stands out as attractively priced relative to its historical trends. In contrast, India looks a tad expensive but then again it’s traded higher than other emerging markets for many years.

  While some fund managers have been buying the dip in China, others remain cautious due to the perceived risks. In our view, it’s too early to write off the world’s second largest economy. Much of the pessimism is likely already factored into share prices. While there may be more challenges ahead, China's role in global economic growth won't simply vanish.

  Looking ahead over the next five to ten years, this could present an attractive entry point for investing in China. For those interested in accessing these stock markets, we think the best way is through a broader Asia or emerging markets fund, as we feature in our five funds to watch for 2024.

  Search for funds on our Wealth Shortlist

• Bond and mixed assets

  Hal Cook, Senior Investment Analyst

  With both the Bank of England (BoE) and the Federal Reserve (Fed) keeping rates at the same level in their last two meetings, there is a growing view that this interest rate rising cycle is either at, or coming to, an end. These pauses in rate rises come off the back of increases at each of the last 14 opportunities by the BoE (and 11 by the Fed).

  Those rises have caused government bond yields to rise, with the 10-year US Treasury yield topping 5% recently (its highest since 2007) and 10-year UK gilts consistently yielding 4.2 – 4.7% over the last few months.

  At the same time, government bond supply has been increasing, in part following the significant government spending required to manage the covid pandemic. This increase in supply has caused bond yields to rise even further, particularly for US Treasuries. More recently though, the US Treasury Department has confirmed that future increases in supply will not be as big as previously thought.

  With bond yields at current levels and two notable headwinds to prices seemingly coming to an end, now looks like it might be a good time to be a bond investor. With the potential of recession in 2024 too, high quality bonds with a limited potential for default are appealing. It is not clear how a recession would impact stock markets. But this is less of a concern for long-term investors in high quality bonds given their relatively fixed return profile.

  Investing in bond funds is a great way to gain diversified exposure to the asset class. Mixed asset funds also offer a way to get some exposure too, with fund managers who can shift their positioning as the market environment develops.

  The flexibility of these funds with many having moved into defensive mode is the key reason why Troy Trojan features in our five funds to watch for 2024.

  More about Troy Trojan, including charges

  View Troy Trojan Key Information Document

  Search for funds on our Wealth Shortlist