With the first calendar month of the year complete, Douglas Sims looks into key market activity from January and the major factors continuing to impact markets in 2024.

After a wobbly start to the year, Global Equities moved modestly higher in January on the back of strong economic data. However, unlike the rally we saw in the final months of 2023, performance was mixed across asset classes. Whilst developed markets were up 1.2%, mostly driven by the US, emerging market equities were down 4.6% as investors remain concerned over the Chinese economy.

The US economy also continues to power ahead and beat expectations with jobs added over the month well above market forecasts. This in turn saw all three major indices (S&P 500, Dow Jones and the Nasdaq) end in positive territory.

Markets were pricing in interest rates to be cut as early as March, but these hopes were dampened somewhat as the minutes of the December Fed meeting were released. Headline inflation also came in at 3.4% in December, up from 3.1% in November, thus further strengthening the argument to delay rate cuts.

In the UK, growth remained soft despite fewer strikes causing disruptions. Stock markets fell slightly as inflation unexpectedly rose to 4.0% in December from 3.9% in November. Consumer spending remains weak as households have been hit with multiple headwinds: the after-effect of high inflation; higher interest rates on mortgages as fixed rate deals expire; and wage inflation taking its time to catch up.

UK interest rates were unchanged by the Bank of England’s Monetary Policy Committee. Interestingly, of the 10 members; three voted in favour of further rate hikes, six voted in favour of leaving interest rates unchanged and only one was concerned rates were too high. As it stands, markets are pricing in the first rate cut in June.

Geopolitical risks remained a concern as Red Sea attacks by Houthi rebels continued in January with retaliatory strikes from the US, UK and a coalition of nations. German trade institute IfW Kiel found that Red Sea container volumes fell by more than half in December and are currently almost 70% below normal volumes. This contributed to a 1.3% decline in global trade overall in December. Towards the end of the month, we saw American casualties in Jordan following a drone strike from Iraqi militias escalating tensions further.

Eurozone equities climbed higher in January as it missed entering a technical recession by the finest of margins. A technical recession is two consecutive quarters of declining economic activity measured by GDP (Gross Domestic Product). The eurozone economy registered no growth in the fourth quarter following a contraction of 0.1% in the third quarter of 2023.

The European Central Bank confirmed future rate cuts will be data-dependent. Core inflation edged down from 2.9% in December to 2.8% in January and futures markets are now pricing in five 0.25% rate cuts this year commencing in April.

Emerging markets dragged down the mostly positive month of January led by fears over the Chinese economy. Brazil and Chile ended the month negative – the most important two Latin American economies whilst Colombian and Peruvian equity was flat. Australian and Korean markets performed well whilst Japan was the strongest gainer after a disappointing December. All three countries recorded falling inflation.

The struggles of the Chinese economy last year were well documented. Weakness in consumer confidence and the property sector remain key concerns. Residential property sales were down 6% year to date to December, given these sales make up about a quarter of the Chinese economy this is a big concern for policymakers. GDP is expected to grow by around 4.5% in real terms this year, compared to 5.2% in 2023, and above 6% in the years prior to the pandemic.

The weakness in consumer and business confidence is resulting in disinflation, with CPI below 0% for much of the last 18 months. Coupled with a significant debt burden, this poses a risk to the economy.

We remain cautiously optimistic about the outlook for 2024 given the strong performance witnessed over the last three months. It is worth remembering that investing always carries an element of risk, therefore we will likely see some volatility due to geopolitical tensions and upcoming elections in the coming months. However, with inflationary pressure easing and interest rates no longer climbing, we should hopefully begin to see economic activity pick up.

If you have any questions or would like to discuss your own investment options following this update, please do not hesitate to get in touch with a MacDonald Partnership Independent Financial Adviser on 01463 242242.

Author: Douglas Sims, Independent Financial Adviser, Integrity365

Published: 16th Feb 2024