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Phil Bain, investment director at Rathbones Investment Management International, reviews 2023 and presents his outlook for the year ahead
THIS time last year, we said that what happened in 2023 would be determined by the answer to two questions: Will the world’s major economies fall into recession? And how far will central banks continue to tighten policy?
That second question was, of course, conditional on a third: How quickly will inflation recede?
At the start of 2023, markets were expecting substantial rate cuts, though our research suggested that they were unlikely to come that soon and, in fact, they didn’t.
Later in the year, we did see opportunities in bond markets, and they rallied strongly in the final quarter of 2023 as they looked ahead to rate cuts in 2024 following a plunge in key measures of inflation.
Resilience underestimated
We underestimated the potential for economic resilience in 2023 and we could have advocated taking more risk. But recessions really matter because they are invariably accompanied by sizeable equity-market falls. There is a very strong correlation between global GDP and global profits and, in 2023, global profits stagnated. The US was an outlier, but even there profits weakened.
Where are we going from here?
The various “goldilocks” scenarios, to which many investors subscribe, could be summed up as “it’s different this time”. Statistically, it’s important to acknowledge that it could be different this time. But tying it all together, the long leading indicators from bond yields, changes in rates and bank lending conditions have continued to signal recession.
Investing in 2024
Valuations in many areas of the market are looking attractive, particularly among smaller and mid-market companies. We’re taking a close look at investments that would tend to do well when the economic environment becomes a little more certain and we are primed to be able to act swiftly. Inflation uncertainty is much reduced compared to last year. We just need a surer outlook for corporate profits.
One risk that we expect will get over-exaggerated this year is the UK and US elections. Our analysis suggests that elections rarely change pre-existing market trends, which are typically determined by factors outside a government’s direct control, unless they bring in a radically different economic model, which is not something we see happening in major economies next year.
A fundamentally weak profit environment may challenge all but the highest-quality companies in the first half of 2024, and another one or two large dips wouldn’t be surprising.
However, the outlook for inflation – a huge source of uncertainty for investors last year – is much improved, especially outside the US, and this should eventually bode well for financial markets.
To sum up, after taking a sober look at the challenges that still lie ahead, we believe that investors do have reasons to be optimistic about the opportunities that 2024 will bring.
