What factors are likely to impact stock markets next year? As hopes of an economic recovery start to build, Garry White, Chief Investment Commentator at Charles Stanley, sets out twelve global market predictions for 2024.
As 2023 draws to a close, there has been a good performance in equity markets in the year so far – with some volatility, as is to be expected. Main stock market indices have risen from the start of the year into summer, before selling off in the autumn. The rally resumed in November.
So, 2023 has been a year of recovery – led by a very strong performance of the technology-laden Nasdaq Composite index and by the S&P 500, with thanks the technology giants contained in this too. Bond yields in advanced markets climbed for much of the year before falling away on hopes rose that we have seen the last of recent interest rate rises.
At Charles Stanley, we are now looking at what might happen next year and have some preliminary thoughts on inflation, growth and interest rates.
1. War in Ukraine and the Middle East will not escalate
The unwelcome outbreak of a second war in the Middle East on top of the Ukraine war in Europe cast an unwelcome shadow over markets and troubled the Western allies. Going into 2024, US President Joe Biden will want to tilt to the arts of peace as he seeks re-election. He will not want to be on a war footing as the election draws near. He will want to be friends with his Jewish constituency whilst not upsetting the Palestinian supporters who are numerous in his party.
Polling shows President Biden has lost support for being too pro-Israel – as many Democrats see him – whilst the Republicans are cooling on more support for Ukraine as they seek spending cuts. Mr Biden will not want to make a strong case for more help for Ukraine if it becomes too partisan an issue. There is no appetite for a general war involving US troops and ships engaged in the battles.
Mr Biden will not want to make a strong case for more help for Ukraine if it becomes too partisan an issue. There is no appetite for a general war involving US troops and ships engaged in the battles
The Pentagon is keen to maintain contacts with Russia and China to avoid chance hostile encounters between planes and ships coming from the two sides. Recent progress has been made in reinstating working level contacts with the Chinese military. Great trouble has been taken to avoid US military personnel appearing on a Ukraine battlefield, and to avoid a US weapon being deployed outside Ukraine against Russia.
These wars are terrible, with many deaths and destruction of property. We do not expect them to intensify or to drag the US and NATO into the fighting. There could be progress with diplomatic initiatives to resolve some of the outstanding issues. US influence in both wars will increasingly be on the side of finding eventual diplomatic settlements. The combatants in both cases are not yet ready for compromise, so we are likely to be living with continuing hostilities.
2. Interest rates will fall in the UK, US and Eurozone
There is general agreement in markets that we have seen the peak of rates in the US, the Euro-area and in the UK. Inflation has been falling in all three areas, money and credit are tight and independent forecasts reinforce central bank expectations that inflation will fall further towards – or even below – the 2% targets.
Lower inflation is more likely in the Eurozone. More sustained inflation above 2% is more likely in the US, where this year’s big fiscal stimulus has offset some of the impact of the monetary squeeze. Rates would only go up further if it appeared that inflation was not under control, as expected.
Lower inflation is more likely in the Eurozone. More sustained inflation above 2% is more likely in the US, where this year’s big fiscal stimulus has offset some of the impact of the monetary squeeze
Central banks would be worried, for example, if wage growth did not subside now price rises are on the wane. Another energy shock would not be as worrying as wage inflation embedding in service-sector inflation. A temporary disruption to oil markets, for example, would probably be ignored by the central banks.
3. Limited fiscal stimulus continuing in the US and Europe
The US deficit doubled to $2 trillion in the most recent financial year to September 2023. It is unlikely there will be further additional stimulus in the current year. Republicans in the House of Representatives are refusing to sign off this year’s budget because they think spending is too high.
There will likely be a compromise – or a series of short-term compromises – to avoid shutdowns of the government, with Democrats accepting further cuts and Republicans accepting more spending and borrowing than they want. The Republican position will itself wish to show some flexibility over military spending, where they favour more support for Israel (though not necessarily for Ukraine) and favour stronger national defences. Republicans want to concentrate cuts on some of the costs of government and the ‘net-zero’ agenda.
There are more pressures from many member states to expand EU programmes, but there is still opposition from Germany and the other main contributors, whilst the seven-year budget framework limits scope for a major fiscal stimulus. However, there is still no agreement on what individual member states can do
In the European Union (EU), there will be continued extra spending by Brussels as it rolls out Next Generation EU, its fund to counter economic and social damage brought about by the coronavirus pandemic. There are more pressures from many member states to expand EU programmes, but there is still opposition from Germany and the other main contributors, whilst the seven-year budget framework limits scope for a major fiscal stimulus. However, there is still no agreement on what individual member states can do.
The EU’s old 3% deficit control, and the limit on state debt to be moving down to 60% of GDP remain suspended. Member states agree the new system must show more flexibility and be less tough in demanding they rein in deficits and borrowings. Germany and a few others are unhappy about much relaxation as they fear they will end up paying for more support for weaker states that get into financial difficulties.
Germany itself is under stricter controls on borrowing as its Constitutional Court has found against the growing use of special funds to get round national restrictions. Overall, there is likely to be a small net increase in fiscal support from the EU for member states as a whole.
4. Green transition to impose additional costs
The road to ‘net zero’ will continue to impose additional costs – and encourage substantial government interventions – in retail prices and profits in markets such as energy, transport, transport vehicle manufacture, and high-energy-using industries.
The main Western countries and the European Union (EU) will stay wedded to the need to cut carbon dioxide creation by individuals and companies. In contrast China, India and other emerging economies will continue to increase their output of the environmentally damaging gas. Western countries will remain under pressure to provide more financial support to poorer countries to help their transitions to greener energy production. The world will be burning more fossil fuel and is unlikely to see peak use before the end of the decade.
There will continue to be large amounts of capital going into renewable energy, grid expansion, electric vehicles of all kinds, electric industrial processes and the switching of domestic heating systems. These will produce some good investment opportunities. They will, however, rely on regulatory changes, tax breaks, subsidies and taxes, as well as prohibitions on the fossil-fuel alternatives.
Governments that have been keen to depress prices for renewable energy and willing to impose additional taxes will need to make the terms more attractive for additional investment in expanding capacity
Investors must get used to energy and substantial parts of industry being more micro-managed by governments. That’s because the state will be partners in the business, providing subsidy, demand and direction.
China is well placed to exploit Western demand for solar panels, turbines, batteries and electric cars. The country’s manufacturing base has gained access to many of the crucial raw materials and installed plenty of capacity to produce the products and refined minerals. EU and US programmes to make more of these things at home will take time to catch up. In the meantime, there will be issues about China’s continuing access to Western markets in these sectors.
After a period of bad performance for many of the quoted green assets, they may rebound next year, assuming governments allow better prices and profits to attract investment. Most utilities, including energy producers, are interest-rate sensitive. Governments that have been keen to depress prices for renewable energy and willing to impose additional taxes will need to make the terms more attractive for additional investment in expanding capacity.
It may also become clearer how the EU intends to roll out its hydrogen fuel system for road traffic, how green aviation fuel will be stepped up and which synthetic fuels may get commercial backing.
5. Growth in defence slows
The US battle of the budget over the approval of more money for weapons for Ukraine and Israel shows there is more resistance to the expansion in defence spending following a period of rapid growth in military budgets.
Germany is working its way through its special defence fund of €100bn and will need to find more budget allocations to sustain its investment in the military to 2% of GDP when that special fund ends as it complies with NATO rules.
NATO itself needs to procure considerably more ammunition and smart weaponry to replace that sent to Ukraine – and to increase its own stock as a precaution. Some re-armament will continue, but we have now seen the big step-up in promises and orders from Germany, Japan and other NATO countries that were spending well below the 2% alliance minimum
NATO itself needs to procure considerably more ammunition and smart weaponry to replace that sent to Ukraine – and to increase its own stock as a precaution. Some re-armament will continue, but we have now seen the big step-up in promises and orders from Germany, Japan and other NATO countries that were spending well below the 2% alliance minimum. It was a good year for defence stocks in 2023 as news of spending increases started to materialise.
6. Markets watch unfolding US presidential election
Current polling still points clearly to a Trump/Biden re-run in the US election, with both unpopular candidates capable of winning. There would be continuity in the policies relating to China, technology transfer and the ‘made in US’ agenda should Mr Trump win a second term, with tax cuts, and spending reductions in green areas, as well as cuts in some welfare payments. He would alter climate-change policy, with a renewed drive for fossil-fuel extraction.
Whatever wider thoughts people may have about Donald Trump the man, when president he was keen to see the equity markets move higher and lowered taxes to help with this aim
We will be watching this carefully as the year advances and the polls fluctuate. Next spring will bring greater clarity over who the final candidates will be. Large numbers of voters worry about President Biden’s age, with another significant group of voters objecting to Mr Trump’s past conduct. Whatever wider thoughts people may have about Donald Trump the man, when president he was keen to see the equity markets move higher and lowered taxes to help with this aim.
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7. The EU will spend, turn greener and be protectionist
The EU will struggle with slow growth. The German motor of past EU economic expansion has now stalled as the car market invests for a world that does not rely on the internal combustion engine. The need for rapid transition away from very popular petrol and diesel cars to the uncertainties of the electric vehicle market is hitting a crucial sector.
In general, industry has been damaged by the sudden move away from what was cheap Russian gas. The ECB monetary tightening has also depressed activity. Germany’s own budget deficit rules are now constraining a government which has been using so called special funds to offer a fiscal boost to a flagging economy. Meanwhile, the slower growing southern states have fared better.
Leading European companies have some good consumer brands, which should benefit from any upturn in world trade and prospects later in 2024
The EU will want to expand its own budget and allow some greater spending and borrowing flexibility for the weaker member states. It will use its big ‘net-zero’ programmes as an opportunity to do both, with more subsidy for its planned roll out of electricity and hydrogen for transport and heating.
Leading European companies have some good consumer brands, which should benefit from any upturn in world trade and prospects later in 2024. The European car industry will face increasing competition from Chinese electric cars and the EU may seek further trade restrictions to protect its own industries. Chinese solar panels, turbines and other green products have the potential to also do well, as Europe invests to meet its ‘net-zero’ targets.
8. Japan will ‘muddle through’ with much lower rates
Japan was following a very different policy for many years following its great financial crash in 1989. The Bank of Japan has been creating yen and buying Japanese bonds on a huge scale.
The government has been borrowing very large sums of money at an interest rate around zero. This did not prove inflationary in the way it normally would.
Our base case assumes Japan will tiptoe to slightly higher rates without falling over.
Many Japanese are elderly, and many are engrained with a savings culture. As the return on savings fell as rates fell, so they felt they needed to save more, not less. The Japanese banks had been so damaged by the crash that they were unable to extend excessive credit on the back of the easy money conditions created by the central bank.
There is now the risk that they get more of what they wish for. If Japan succeeded in generating Western-style inflation it would need a big shift in the country’s average interest rates. That would create difficult pressures on an overborrowed state and create enormous losses on bonds
Today, the Bank of Japan is edging Japanese longer-term interest rates up, no longer buying enough bonds to keep the ten-year interest rate at zero. So far, it has got away with this though, of course, it is building up losses in the bond portfolio held by the central bank. It will also start to boost the total interest costs of the government as borrowings fall due for refinancing at higher interest rates. The very high debt-to-GDP ratio has only been sustainable because interest rates were around zero.
So far so good. Our base case assumes Japan will tiptoe to slightly higher rates without falling over. The authorities are still more worried about inflation subsiding again and are keen to promote annual upwards increases in wages.
There is now the risk that they get more of what they wish for. If Japan succeeded in generating Western-style inflation it would need a big shift in the country’s average interest rates. That would create difficult pressures on an overborrowed state and create enormous losses on bonds. The good news in that situation is that most of the debt is owed to fellow Japanese, so the government could come to a new agreement on how past debts are honoured, new debts are incurred and how much the state can, in those circumstances, afford to spend and borrow. In the meantime, Japanese bonds are not attractive compared to the much better income available on US Treasuries.
9. China will aim to sustain 5% growth
China has taken a lurch to more authoritarian control and has lost some of its access to Western technologies and markets as a result. It is an even more managed economy, where the Chairman of the Communist Party Xi Jinping looks as if he wants to settle for growth of around 5%.
The state has some leeway to cut interest rates, expand state borrowings and spend more. The property sector still has the most excess in borrowings, with the state willing to take tough action. Some foreign lenders have lost money, debts have been written off and interest not paid.
As the US squeeze on Chinese access to US technology intensifies, it makes life a bit more difficult for China. However, in some crucial areas such as batteries and green products China has its own domestic capability to innovate and produce
The lack of visibility of the internal policy debate and the ability of the leadership to make big unheralded changes, as with the sudden end to lockdowns, adds to the risks of Chinese markets for overseas investors, as does the low priority given the needs and concerns of foreign owners.
As the US squeeze on Chinese access to US technology intensifies, it makes life a bit more difficult for China. However, in some crucial areas such as batteries and green products China has its own domestic capability to innovate and produce. China is still capable of exporting many manufactured goods and has a strong market share in the products needed to meet ‘net-zero’ targets.
10. Inflation will further moderate on both sides of the Atlantic
Central banks were slow to hike rates and even slower to rein in their money creation and bond buying as inflation started to rise. They first denied it would happen, then they said it would prove transitory. Instead, inflation rose higher and has stayed higher for longer.
Though price rises are now well down on peak rates in the US, EU and UK, inflation is still above target. Despite the big monetary squeeze, labour markets have held up – with many people not wanting to rejoin the labour market to seek a job. Employers are encountering difficulties in recruiting are holding on to the employees they have.
It seems likely inflation will come down enough to avoid the need for further interest rate actions. Should more weakness appear, as it may in the Eurozone in particular, it will speed the case for earlier rate cuts
Lower interest rates will end the need for higher property yields overall. The main worry central banks have in service-sector dominated economies is continuing labour shortages and a drive to higher wages unmatched by productivity. All three areas are running with substantial inbound migration, which eases supply of labour problems. There are now signs of demand for additional labour waning as sectors such as housing and construction get hit by high interest rates. It seems likely inflation will come down enough to avoid the need for further interest rate actions. Should more weakness appear, as it may in the Eurozone in particular, it will speed the case for earlier rate cuts.
11. A property turnaround?
Property has been badly hit by rising interest rates and by the social revolution that followed the Covid-19 lockdowns. People expect that companies will have a shrinking requirement for office space as they adjust their needs to allow for more homeworking. The decline in people going to shopping centres and high streets – a trend already in place before the pandemic – has accelerated as lockdowns gave a big boost to online retail through greater exposure and uptake.
Looking forward, lower interest rates will end the need for higher property yields overall. Many companies will still need offices – so spaces that meets high standards of green performance and match the requirements for plenty of meeting rooms and collaboration space for staff will do better. Well-located shopping areas with plenty of restaurant, coffee shop, leisure, entertainment and services space will be given an advantage. There will be plenty of footfall should the owners of retail centres get the right mix of businesses and understand that shopping can be part of a wider family day out and experience.
Looking forward, lower interest rates will end the need for higher property yields overall. Many companies will still need offices – so spaces that meets high standards of green performance and match the requirements for plenty of meeting rooms and collaboration space for staff will do better
The last two years have also seen a sharp downward adjustment to values of industrial space – despite good demand for warehouses for online order fulfilment and for cloud-computing capacity. Rental success here may be better rewarded next year. It could well be year of recovering valuations for the right kind of property asset now that many have been depressed by higher rates and the need to write down past asset values in their books.
12. The US will continue to lead the AI race – but collaborate
2023 was the year for investments in digital companies. The year began as a likely recovery story after the way so many good technology-company shares were sold off in 2022. The negative performance was on the grounds that the sector was overvalued relative to bonds and bank deposits as interest rates rose increasing the costs of servicing debt.
The prominence of optimism about the future of artificial intelligence (AI) started early in the year after the unveiling of AI chatbot ChatGPT sent many investors scurrying to hold enough of the new ‘fast-growth’ stocks. We have probably seen the best of that trend, which has produced some remarkable share price performances led by Nvidia.
We are now seeing the accelerated earnings growth coming through to justify many of the uplift in valuation of companies involved in the sector, but there is unlikely to be a further upward adjustment to expectations or a major addition to the bullish story in 2024
We are now seeing the accelerated earnings growth coming through to justify many of the uplift in valuation of companies involved in the sector, but there is unlikely to be a further upward adjustment to expectations or a major addition to the bullish story in 2024. Any company that does not live up to market profit forecasts is likely to suffer a sharp fall. The Big Three AI companies – Microsoft, Amazon Web Services and Alphabet’s Google Cloud may continue to do well out of the changes. Fast-growing smaller companies in the space may be acquired or become important business partners of the Big Three.
In summary: markets focus on recovery in 2024
If 2024 pans out as expected, with slowdowns or shallow recessions and investors looking forward to recovery by the end of the year, there will come a time when shares in smaller companies and industrial businesses will come back into favour. They should respond better to well-based hopes of an economic recovery once markets have established the depth and length of the squeeze now underway. Sometime next year, more central banks and governments may pivot to more growth-orientated as they decide the work on inflation is – at last – done.
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