Our expert Investment Management team at True Potential Investments give their views on markets throughout January 2024.
The key developments we have identified in January were:
- Central Bank’s inflation targets for developed markets
- Central Banks could start reducing interest rates in Spring
- Global economic growth could remain positive through 2024
- Inflation will slow in the second half of 2024
United States.
Disinflation is where the rate of inflation is falling whilst economic growth remains positive, typically this is supportive for equity and bond returns. We have credible evidence we are in a disinflationary environment and we anticipate this to continue through the first half of the year.
Analysing the inflation trends suggests that the Federal Reserve’s inflation target could be achieved by the Summer. We believe inflation will settle in a range of 2%-4%* with economic growth remaining positive.
Economic growth is currently running higher than the long-term trend (2%*) with the economy expanding by 3.3%* (annualised) in the fourth quarter 2024. Despite interest rates rising by 5.25%* in the last two years, financial conditions are not restrictive which should be supportive for economic growth.
We believe the Federal Reserve have scope to lower interest rates. This has been well acknowledged by the market, with an expectation that rates could be 1.25%* lower over the next 12 months and be at 3.25%* at the end of 2025. Any sign of monthly inflation trending higher could challenge the magnitude and timing of interest rate reductions.
We expect corporate profit growth (earnings) to accelerate later in the year, supported by the consumer, with wage growth exceeding the rate of inflation, alongside falling inflationary pressures.
Rest of the World.
We have noted a material moderation in European inflation pressures, roughly halving in the last four months. The consumer price index currently measures inflation at 2.9%*.
UK inflation has proved stickier, we expect to see an improvement through the first half of the year as the base effect of wage growth in 2023 has less of an influence.
Economic growth in both the UK and Europe is expected to be below 1% in 2024*. We believe this combination may encourage the European Central Bank and Bank of England to loosen monetary policy and lower interest rates before the Summer.
We are seeing little evidence of economic growth from China, or signs of a material shift in support from the housing sector, which would be key.
Valuations.
We are positive on equities. The US is the largest equity market in terms of value and is the largest equity allocation within our True Potential Portfolios.
Our tactical positioning is supported by the region’s robust economic growth prospects relative to other developed countries and the potential support to economic activity from interest rates being lowered. We also see an opportunity in Japanese equities.
We remain positive on government bond yields available, however, given the economic growth landscape corporate bonds are of interest.
Alternative investments continue to play a key role in the True Potential Portfolios, however, we wish to have a lower allocation in this environment given the diversification benefits available from fixed income.
*All data sourced from Bloomberg.
With investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. The forecasts in this article are not a reliable indicator of future performance. This blog is not a recommendation or personal financial advice.
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