Comment and opinion for retail investors in the UK
At times I am reminded of how utterly stupid, even blind to reality, stock market participants can seem to be and how that can have a short term impact on valuations.
Today (Tuesday 13th February) US inflation figures came in a little higher than expected, resulting in an instant sharp sell off as markets worry about delays before interest rates start to come down. In itself this is no surprise, but it is not a useful indicator of what is really happening.
Assessing the likely direction of stock markets always requires a multi-faceted approach. One needs to be aware of the main macro economic trends within each major geographical region (broadly North America, Europe, the UK, the Asia Pacific region and Japan).
Things like GDP growth levels, interest rates set by central banks and consumer and producer optimism indices will always get a mention in analysts’ and strategists’ presentations, and as context and drivers of market mood, these are important.
However, economics is an inexact ‘science’ and that sort of data is only useful to the extent that it becomes accepted wisdom and will drive market behaviour. For example, a general consensus (which is the best you are ever going to get) that interest rates are going to come down will result in changes in the bond yield curve and that will have an impact on valuations. If rates do not come down after a long wait, then the consensus will change and that will have some sort of impact. This is just an example of a ‘macro’ factor impacting valuations and feeding into asset allocation decisions.
We are now far enough into January to have absorbed enough data and commentary to get a feel for how market participants are expecting 2024 to turn out for the year. In a word, as they say in Lithuanian (implying a few), the mood is nervously optimistic.
Going into a little more detail, here are some pointers for you from the first 3 weeks of 2024. As the year progresses, I will keep you alerted to new data that will help you with asset allocation decisions, profit taking and risk control. As always, you can ask me specific questions or comment if you are a subscriber.
[Read more…] about Midweek musings – some signs of market directionI promised a look back on 2023 and some pointers on what to look out for in 2024, with just a smattering of predictions for the coming year. Let’s do it!
I spotted that the FT ran a headline on December 31st along the lines of 2023 being the best year for markets since 2019. As 2020 was something of a special year due to the pandemic and the end of 2021 was the collapse of the long, fantasy driven, free money, bull market, that is not a hugely inspiring claim. 2022 saw the realization that fixed income stocks and growth equity discounts had been based on a wildly optimistic bet that interest rates would stay low for ever, so was an equally gloomy year (but one that many had seen coming).
2023 was in fact at the start very much a continuation of 2022, with an expected recovery in fixed income (bond) valuations deferred longer than many (including me) anticipated as central banks dramatized their heroic role in battling inflation with ‘higher for longer’ interest rates. It was only in late October that markets collectively decided not to believe that rates were going to stay up much longer and a new, and I think permanent, upward trend in valuations commenced.
If interest rates were the main driver of 2023 markets as a whole, then a whole raft of economic problems in China, or more exactly the very negative perception of Western investors about China as a place to invest, meant that a place where you would have wanted to lower your asset mix exposure in 2023 was China and by implication, many Asia Pacific and Emerging Market funds where the managers were still sticking to heavy fund weightings in the main China and Hong Kong stock markets.
A place where I thought investors ought to be confident bumping up their asset allocations was the unloved UK. Some funds with careful stock picking have already offered very solid returns from portfolios of mostly UK shares and I think this is just the start of a new phase when global money flows into UK companies with secure profits and ridiculously low P/E ratios. A recovery in technology shares was kicked off by almost irrational enthusiasm for everything you could stick an AI badge on.
So we have arrived, for better or worse as always at the start of a new year.
It looks we may be in for a rather late Santa Claus rally in the UK market with better than expected inflation numbers just published.
I was amused to see someone in government or the Bank of England saying that workers would need to accept lower pay rises before the central bank interest rate would come down. With many fixed rate mortgages at low rates coming to an end now, I can imagine many a home owner adopting the mirror position and unions also saying that as long as interest rates remain high, workers need large pay rises!
The sharper than expected drop in inflation without a large rise in umemployment, which is what is also happening in other major economies, further confirms that the bout of infaltion which is now tailing off was driven by supply side factors and central banks are likely to cause uneccesary recessions if they don’t take their foot of the brake and start a little stimulus before long.
Markets, I suspect, do not believe that the hawks on central banks committees are any more in the majority, so are anticipating rate cuts in 2024. The risk to equities is in fact the aforementioned potential recessions.
Fixed income assets are for that reason useful insurance at the moment – in fact something of a one-way bet.
My January monthly briefing will be the next publication from me, when I will look back briefly on 2023 and do some crystal ball gazing for 2024, like a true Janus.
Until then, I wish all my readers a peaceful, healthy and happy fortnight over the holiday season. And a nice fat portfolio valuation for December 31st!
As I have repeated ‘ad nauseum’ the likely direction of both equity and fixed income valuations has for many months depended only only one factor: what markets though would be the next central bank move on interest rates.
Different market segments have reacted in slightly different ways, such as short dated bonds doing better than long dated when rate rises were frequent, but really the alleged ‘fight against inflation’ has been the only news you needed to follow.
I think that will change in 2024.