Reflections of the CIO… January 2024

The first month of 2024 was a little more mixed than the euphoric end to 2023. Whilst the overall tone remained positive, encouraged by the absence of any notably bad news, the pace and breadth of market movements slowed, as a greater degree of nuance crept into investor decision taking.

Expectations of a peak in the interest rate cycle and the avoidance of recession in the Western economies had propelled equity indices skywards in the final months of 2023, and left markets with plenty of good news priced in as the new year began. Some sectors, such as the largest US technology stocks, broadly delivered on high expectations in January, reporting strong profit numbers and, as a consequence, driving the US equity market to a new (nominal) high. However, even within this narrow group, the so called Magnificent 7, there was a wide spread of share price performance as investors began to sift out the likely eventual winners and losers from the Artificial Intelligence (AI) boom.

The Federal Reserve was much less nuanced in its decision taking and messaging in January, with a clear removal of their ‘bias towards tightening’ policy, confirming the markets view that inflation had peaked and would return to target later in the year. Despite this comforting message, which was echoed in Europe and the UK, there remain important differences between central banks and markets on exactly when, and by how much, interest rates can be cut. For example, investors are expecting up to six interest rate cuts in the USA over 2024, double what the US central bank is currently guiding to. The Bank of England and European Central Bank are also wrestling with similar timing issues, complicated by the fact that it is simply harder to read the underlying economic trends in the UK and Europe, than it is in the USA.

On the other side of the world, the early year headlines from the important Chinese economy where much more nuanced than headlines suggested. A collapsing equity market dominated investor sentiment, with piecemeal support from the authorities unable to stabilise market levels. This negative issue has obscured some notably more positive events, such as the stronger performance in the local corporate bond markets and the muted reaction to Taiwan’s election of a pro-independence candidate. Behind the scenes, we have a feeling that the drip, drip approach of the Chinese government in dealing with its huge property market collapse is gradually having an effect. The cumulative impact of multiple interventions is a very Chinese solution to the problems, different from the ‘bazooka’ approach which Western investors have become used to in their respective economies. The stabilisation and uptick in Chinese corporate bond markets over the last three months is a solid signal of progress and we are hopeful that this can continue to improve throughout the year, supporting our ‘glass half full’ overall top-down outlook.

This outlook for the year ahead, in essence, assumes a series of noisy, erratic shorter term periods, built on top of a steadily improving underlying trend. The ‘noise’ in the near term will come mainly from the process of working out if the West really can cure its inflation problem without causing a nasty economic slowdown. So far it looks as if it can, but it is still early days and expectations are high. Political risk is something that is still relatively low at the moment, despite the headlines from the Middle East. That can easily change and we also have the  looming prospect of a headline rich and volatile US election to come later in the year. The UK election, by contrast, is not expected to impact markets in aggregate, given the relative similarity of the economic policies that any victor is likely to follow.

Putting it all together, January has seen no reversal in the underlying more positive tone to the investment environment that began in earnest late last year. The months ahead will test this positivity and we have kept back some dry powder in portfolios to take advantage of any opportunities these tests bring with them. We would expect to be buying into weakness, reflecting our thinking that the positive tailwind from the interest rate cycle turning down in the West will prove strong enough, in the end, to offset the multiple headwinds coming from other areas. We look forward to expanding on our thinking and portfolio actions in this report over the months ahead.