STOCKS ARE OFF TO A BUMPY START IN 2024
▶ Persistent inflation, geopolitical risks and upcoming US elections pose risks to investors, writes Harvey Jones
Stock markets ended last year on a high but the excitement has not continued in 2024, as it soon became clear that investors got carried away about interest rates and the prospects for the global economy in the year ahead.
Investors are now waking up to a world of geopolitical risk, as Russia’s President Vladimir Putin appears to gain the upper hand in Ukraine, the Israel-Gaza war continues, commercial shipping comes under fire in the Red Sea and tension between the West and China grows.
As investors watch January take back much of their gains over Christmas, how worried should they be?
Markets spent most of 2023 waiting for inflation and interest rates to peak and as the year drew to a close, they appeared to get their wish, says Vijay Valecha, chief investment officer at Century Financial in Dubai. “In mid-December, the US Federal Reserve signalled that it is done [with] raising interest rates, with three potential cuts of 25 basis points in 2024,” he adds.
History shows that market performance is often strongest in the early part of the rate cutting cycle and investors were keen to take part. Hence the rally.
However, the first week of January brought a “much-needed reality check”, says Mazars chief economist George Lagarias.
“Some bullish market participants convinced themselves the Fed could proceed with rate cuts as early as March.”
When the Federal Open Market Committee published minutes of its December meeting last week, reaffirming its position that rates would stay high for “some time”, they were disappointed, he says.
Markets had priced in a whopping six interest rate cuts this year, but it has become clear the inflation dragon is not slain yet, says Chris Beauchamp, chief market analyst at online trading platform IG.
“With Red Sea disruption affecting more and more shipping, it seems we could be in for a resurgence.”
So far, this has hit container ships more than oil tankers but the uncertainty still drove up crude prices, Mr Beauchamp adds.
There is no end in sight for the political turbulence in a year when more than two billion people in 50 countries will vote in national elections, including the most important of all, says Lindsay James, investment strategist at Quilter Investors. “There has perhaps never been a more consequential and important US presidential election than this one. It tops the list of the events to watch in 2024.”
If Donald Trump runs again, the country’s divisiveness will hit another level, she says.
“US democracy could be put under severe pressure and stock markets may not like that.”
The election could boost equity markets in the short term, as President Joe Biden will maintain high levels of government spending to boost his re-election hopes.
If Mr Trump wins, anything could happen. He has threatened to introduce 10 per cent tariffs on all imports, a policy that could set off a global depression, although expected tax cuts could fire up the US stock market.
The election will be closely watched in Ukraine and Russia, where a Trump presidency would take a softer line on Mr Putin than the Biden administration.
Despite growing hopes of a soft landing, a recession is still a possibility, with the UK and Europe vulnerable, Ms James says.
Investors took time out from fretting over macroeconomics and geopolitics to worry about actual companies, including the biggest of them all: Apple, the $3 trillion technology titan.
Its shares fell 3.6 per cent last Tuesday after Barclays downgraded them to “underweight” on disappointing iPhone 15 sales, particularly in China.
Technology stocks had a stellar 2023, driving the S&P 500 up by about 25 per cent, but many believe the “Magnificent Seven” mega-caps look too pricey.
Yet, Christian Gattiker, head of research at Julius Baer, believes that generative artificial intelligence and cloud computing remain attractive and dismisses fears over expensive valuations.
He favours “quality growth companies” in 2024. “This means an emphasis on information technology, communications and health care. On a regional basis, we keep our preference for US stocks.”
Mr Gattiker also favours government and corporate bonds as the fixed-interest rates they pay will look more attractive as rates are cut.
If inflation continues to fall back towards central banker target rates, today’s market “jitters” should calm, Mr Gattiker adds. “The start of a new cycle should open many opportunities and, after a possibly bumpy start, reward those ready to take risks. Especially those who chose to be invested from the very start.”
If he is right, investors should consider taking advantage of the January stock market blues and buy the dip.
Some will be tempted by emerging markets, which look notably cheap after yet another disappointing year.
Andrew Ness, portfolio manager of Templeton Emerging Markets, says that after more than a decade of underperformance, many are understandably pessimistic but adds: “We believe 2024 has the potential to be a better year as the asset class remains under-owned, underestimated and undervalued.”
Lumping a host of different countries under the catch-all emerging markets banner has always been misleading – and particularly so today.
Jason Hollands, managing director of financial planners Evelyn Partners, says the sector did better than many realised, but was dragged down by a tough year for the Chinese economy.
“The MSCI Emerging Market Index grew just 1.9 per cent but without China, the return would have been a far better 11.2 per cent.”
Investors always have to look past short-term market mood swings and this January is no different, Mr Hollands says.
If last year was all about inflation, this year it is the politics that count. On that score alone, 2024 could be very bumpy indeed.
The start of a new cycle should open many opportunities and, after a bumpy start, reward those ready to take risks
CHRISTIAN GATTIKER
Head of research at Julius Baer