Market Commentary January 2024

Dafferns Wealth

As the new year gets underway, there are positive signs that the inflation crisis around the world is finally starting to ease.

But this doesn’t seem to have been accompanied by a surge in economic growth in many crucial markets. In fact, growth seems stubbornly slow in some countries.

As always, let’s take a closer look at key markets across the globe to find out how they’ve been performing recently.

The UK economy contracted by 0.3% during October 2023, according to the latest official figures. This came after an increase of 0.2% in September, indicating that the government’s efforts to drive sustained growth are hitting a wall. Indeed, the decline seen in October was much bigger than many analysts had expected, and was attributed partly to the underperformance of the services, manufacturing and construction industries during this period.

There was better news to be found in the latest inflation data, however, with the Office for National Statistics reporting that the annual rate of price rises slowed to 3.9% in November. But while this means inflation is at its lowest level in more than two years and well below its peak in 2022, it is still nearly twice the Bank of England’s target of 2%.

High interest rates are also among the factors putting pressure on households and businesses alike, and in December, the Bank of England’s Monetary Policy opted to keep interest rates on hold at 5.25%. This was the third consecutive rate freeze, following 14 consecutive increases. Bank of England Governor Andrew Bailey has so far refused to be drawn on when interest rates could be brought down, saying it is “too early” to speculate at the moment.

One factor driving the Bank of England’s interest decisions in the near future will be wage growth, which eased to 7.3% in the three months to October. While this is above inflation, it suggests that rate cuts are unlikely in the next few months at least.

The performance of the housing market will also be crucial, although new figures indicate it could be one potential green shoot in the economy. According to Nationwide, house prices rose by 0.2% in November 2023, taking the average price of a UK home to £258,557. While this is 2% lower than in the same period of the previous year, Nationwide believes the figures suggest interest rates have peaked and will start to come down, therefore easing affordability pressures on buyers.

Interestingly, cost of living pressures on consumers are prompting many to change how they make transactions, using notes and coins rather than digital payment options. According to the British Retail Consortium, 19% of purchases in 2022 were made with cash, up from 15% in 2021, which it believes is because shoppers are keeping a close eye on their budgets in this climate of high inflation.

In the business sector, the Competition and Markets Authority is scrutinising Microsoft’s new partnership with OpenAI, the company behind ChatGPT. The regulator is examining whether the collaboration can be considered as a merger, although Microsoft has insisted it has “preserved independence” for both businesses.

Meanwhile, the government’s efforts to overhaul financial services regulation have been dismissed as a “damp squib” by the Treasury Select Committee.

In late 2022, Chancellor of the Exchequer Jeremy Hunt unveiled the “Edinburgh Reforms” of financial services – plans to repeal and replace EU retained laws governing the sector. This, he said, would help secure the UK’s status as “one of the most open, dynamic and competitive financial services hubs in the world”.

However, the Treasury Committee believes little progress has been made since the package was unveiled. Although Chair Harriett Baldwin acknowledged that ministers were right to update rules to encourage growth, she said the “the validity of claims that welcoming consultations, establishing reviews or publishing documents should be considered reforms” are questionable.

Separately, the UK financial services sector has been given a boost by a new deal with Switzerland. The new Berne Financial Services Agreement will make it easier for financial firms in the UK and Switzerland to trade, which Mr Hunt believes will open “each other’s markets up to the other in a way that will boost competition and choice”.

As the eighth anniversary of the Brexit referendum approaches, the nature of the UK’s relationship with the European Union is still under the microscope.

Lord Cameron, the Prime Minister at the time of the vote and now the UK’s Foreign Secretary, believes the “heat and anger” has now gone from the UK-EU relationship, and that it is now “functioning well”.

Notably, the current Prime Minister Rishi Sunak has struck up a strong partnership with his Italian counterpart Giorgia Meloni, with both seeking to take a hardline approach towards immigration. In December, Mr Sunak attended Ms Meloni’s Atreju political festival, where he stated that migration threatens to “overwhelm” Europe.

The pound ended December down 0.02% against the dollar, and on the financial markets, the FTSE-100 Index ended the month at 7,733 points, up 2.71% on November.

Economic growth remained sluggish in Europe, with data from Eurostat showing GDP fell by 0.1% in the eurozone in the third quarter of 2023, when compared with the previous three months. Across the EU as a whole, GDP went up by just 0.1%.

Spain was one relatively strong performer, with its economy growing by 0.3% during the quarter, while Italy saw growth of 0.1%. But Germany continued to struggle, with its economic output contracting by 0.1%, overturning a 0.1% gain in the second quarter.

Germany’s central bank expects to see a further contraction in the fourth quarter, due to weak performances in industry and construction. Unsurprisingly, Germany’s economic woes are impacting on business sentiment, with the Ifo Institute reporting that its business confidence survey declined from 87.2 points in November 2023 to 86.4 in December 2023.

Across the eurozone, there was better news with regards to inflation, as it fell from 2.9% in October to 2.4 % in November, which means it is now fairly close to the central bank’s target of 2%. Meanwhile, the European Central Bank opted to keep interest rates on hold at 4% – the second hold since it began hiking rates in 2022.

December saw the EU sign a trade agreement with Kenya, which forms part of a wider strategy to build closer economic links with Africa. Last month also saw European leaders agree to open membership talks with Moldova and Ukraine and for Georgia to be granted candidate status.

However, the EU is split over future military aid for Ukraine in the face of the continuing Russian invasion, with Hungary blocking £43bn in EU aid for Ukraine. Despite this setback, the EU has insisted it will continue to support Ukraine as the conflict approaches its two-year anniversary.

Meanwhile, the EU has launched its first formal proceedings under the Digital Services Act against X, formerly known as Twitter. The social media platform is suspected of breaching EU rules on tackling illegal content and disinformation, as well as breaching transparency requirements.

In a statement, X has said it is “co-operating with the regulatory process”, but insisted it is focused on “creating a safe and inclusive environment for all users on our platform, while protecting freedom of expression”.

Elsewhere in the social media sector, Threads has finally launched in the European Union. The social media app was created by Meta as a potential rival to X and gained more than 100m users in its first week.

On the financial markets, Germany’s DAX index rose by 2.16% in December to end the month at 16,751 points. Meanwhile, the French CAC 40 index rose by 2.68% to end at 7,543 points.

The US economy looks set to avoid recession in 2024, with gross domestic product going up by 2.1% this year, according to new forecasts by Goldman Sachs Research. This is above the 1% growth predicted by economists polled by Bloomberg.

David Mericle, Chief US Economist at Goldman Sachs Research, said: “It was fair to wonder last year whether labour market overheating and an at times unsettling high inflation mindset could be reversed painlessly. But these problems now look largely solved, the conditions for inflation to return to target are in place, and the heaviest blows from monetary and fiscal tightening are well behind us.”

In fact, Goldman Sachs Research rates the probability of the US slipping into recession over the next year at just 15%.

Meanwhile, the US Federal Research has opted to keep interest rates at a 22-year high of 5.25% to 5.5%. However, the Fed has indicated that interest rate cuts could be in store if inflation continues to come down. The consumer price index rose by 0.1% in November and was 3.1% up on the previous year, according to Labor Department data. This was broadly in line with expectations.

Another positive indicator for the US economy came in the form of rising retail sales. Whereas sales edged down by 0.2% in October, they rebounded by 0.3% in November. This was well above the 0.1% drop predicted by economists polled by Reuters.

The employment market also confounded analysts, with 199,000 jobs being added in November and the jobless rate falling to 3.7%. This was much better than analysts had predicted, and reflected the recent resolutions of industrial disputes involving the car industry and workers in Hollywood.

Actors union Sag-Aftra had been on strike since July, but since a tentative deal was agreed with Hollywood studios, its contract has now been formally ratified and production on TV shows has resumed.

However, a dispute involving the United Steelworkers union could be brewing, after it called plans by Japanese steel giant Nippon to buy US Steel “shortsighted”. The union has said it will try to block the £12bn takeover, which would lead to the creation of one of the biggest steel companies in the world.

Another big merger could be on the way in the film and TV industry, as multiple media outlets are reporting that Warner Bros Discovery and Paramount Global are in early talks over teaming up. The two companies have a combined market value of £30bn and have both sought to minimise losses and cut costs in recent years after bolstering their streaming propositions.

On the financial markets, the Dow Jones rose by 3.98% to end the month at 37,689, while the more broadly-based S&P 500 index went up by 3.81% to end at 4,769.

Far East
China’s mounting debt pile has led to credit ratings agency Moody’s expression concerning and cutting its outlook on government debt from stable to negative. The Chinese government has insisted its economy is resilient, while the Ministry of State Security alleged the move is an attempt to hinder China’s development.

China has also received a blow from Italy, as the new Prime Minister Giorgia Meloni has confirmed it is pulling out of the Belt and Road Initiative – a significant trade and infrastructure project. The £794bn project encompasses a range of schemes including upgrading ports and railways to improve connections between China and other parts of the world.

Recent months have also been characterised by ongoing tensions between China and the US, and while efforts have been made to improve their mutual relationship, the situation remains fraught.

For instance, the US government has announced new rules to reduce its reliance on Chinese manufacturers. While this is in part designed to help the US expand its own electric car industry, it also reflects concerns that relying too heavily on Chinese manufacturers could create economic and security risks.

However, China is successfully forging closer ties with other countries, as President XI Jinping recently met with his Vietnamese counterpart Nguyen Phu Trong. This came a year after Mr Trong visited Beijing and was awarded with a Friendship Medal.

In Japan, the economy contracted by 2.9% between July and September, when compared with the same period of the previous year. This was a considerably higher decline than had been anticipated, and reflects ongoing issues such as falling business and consumer spending.

Continued high inflation – 2.9% year-on-year in October – is among the factors holding back growth in Japan, although the Cabinet Office remains cautiously confident, acknowledging that while “some areas stalled recently”, the economy is “recovering moderately”.

Data from the Bank of Japan shows that business sentiment is improving, with manufacturers feeling more confident in Q4 than at any time in the previous two years, while confidence among non-manufacturers is at its highest level in more than three decades.

Nobuyasu Atago, Chief Economist at Rakuten Securities Economic Research Institute, believes the deteriorating picture means it would be “risky” for the Bank of Japan to end its negative interest rate policy. “Still, I think their main scenario is they will make the move in January with new price forecasts,” he said.

On the financial markets, Hong Kong’s Hang Seng index rose by 1.29% to end December at 17,047, while Japan’s Nikkei index rose by 0.1% to 33,464.

Emerging Markets
India appears to be bucking the trend seen in many other parts of the world, with the International Monetary Fund (IMF) predicting economic growth of 6.3% in the current fiscal year ending March 31st 2024.

The IMF believes this strong growth is being driven by factors including a government infrastructure programme, as well as macroeconomic and financial stability. However, the IMF’s forecast is lower than the 7% growth predicted by the Reserve Bank of India.

The IMF believes India will account for more than 16% of international growth, as it has become a “star performer” and is growing at a “very robust rate”. “It’s one of the fastest growing large emerging markets,” observed Nada Choueiri, the Mission of India at the IMF in an interview with PTI.

However, policymakers in India will be mindful of rising inflation, as a poll of economists by Reuters found that the consumer price index went up at an annual rate of 5.7% in November, up from 4.87% in October.

Brazil remains another emerging market to keep a close eye on in 2024, although this year economic output looks set to fall slightly. According to a survey of economists by the central bank, GDP is likely to go up by 1.51% in 2024, down from 2.92% in 2023.

Analysts believe falling interest rates are helping to drive growth in Brazil, and last month, the central bank reduced the Selic by 50 basis points to 11.75%. This is the fourth consecutive rate cut and policymakers are not ruling out further reductions in the coming months.

Meanwhile, sanction-hit Russia also appears to be performing strongly, seeing GDP growth of 5.5% in the third quarter of 2023. Former central bank official Alexandra Prokopenko described the economy as “resilient”, but acknowledged that a great deal depends on what the government does next.

“The current pace of GDP growth is mostly because of these war expenditures, which basically means that once the Russian state stops spending on the war, the growth will stop or slow significantly,” she said.

Ms Prokopenko also observed that the central bank must keep interest rates high in order to keep inflation under control. Interest rates are currently 16%, following five consecutive rate hikes.

Russia has been hit by international sanctions since it began its invasion of Ukraine almost two years ago, and December saw the European Union adopt its 12th package of economic and individual sanctions against the country.

Josep Borrell, EU High Representative for Foreign Affairs and Security Policy, said: “With this package, we are putting forward a robust set of new listings and economic measures which will further weaken Russia’s war machine. We remain steadfast in our commitment to Ukraine and will continue to support its fight for freedom and sovereignty.”

It seems likely that Russia will continue on its current course in Ukraine, especially since President Putin has confirmed he will stand again for a fifth term in office.

But despite sanctions imposed by other countries, some Russian businesses are still reporting healthy trading figures. Energy giant Gazprom, for example, has said it earned £39m from its gas field in the North Sea last year.

On the financial markets, India’s BSE Sensex index rose by 7.05% to end at 72,240 points. Russia’s MOEX index went down by 1.37% to close at 3,099 points, while Brazil’s Bovespa index ended the month up 6.36% at 134,185 points.

And Finally…
Since this year is a general election year in the UK, we couldn’t help but notice a famous political name from years gone by pop up in the headlines, but not for the reasons you might have expected.

Karen Schmit from Norwich was selling an ironing board on Facebook when commenters pointed out that the face of Margaret Thatcher appeared to be seared into the fabric cover.

Mrs Thatcher, Prime Minister from 1979 to 1990, was of course known as The Iron Lady, so headline writers covering the story will probably have had their easiest day at work for many years.

Karen was originally planning to sell the ironing board for £5, but now intends to keep hold of it. The lady was for turning, after all…