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Look back, move forward – an investors' overview

Get clarity and practical investor insights – our expert investment commentator, Jason Hollands, distils investor analysis from 2023 across equity markets, UK mortgages and politics. Remember, with investment, your capital is at risk.

Published on 31 Jan 20246 minute read

Written by Jason Hollands

What happened to global market predictions for 2023?

Roll the clock back 12-months and it’s worth noting that the consensus view at the time about how the year would shape up turned out to be wide of the mark. Three commonly held views were:

  1. Recessions were looming, with an inversion of the yield curve in bond markets – a scenario when long-term interest rates in the financial markets move lower than short-term rates – cited as an historically reliable indicator
  2. China however would experience a sharp economic rebound having ditched its draconian Covid-19 lockdowns
  3. S&P 500 Index was set for negative returns - a Bloomberg poll of investment strategists revealed most of them expected negative returns from the S&P 500 Index of large US companies during 2023

Well look how things turned out…

  • The most telegraphed recessions in living memory never arrived, with the US economy in particular proving remarkably resilient and the UK also avoiding a contraction
  • The expected China rebound faded away as growth faltered and concerns about the fragility of its property sector cast a shadow
  • And by the end of 2023 the S&P 500 Index rose 21%1 in dollar (USD) terms (though much of the gains were delivered by a small number of mega-cap growth stocks seen as winners from the emergence of Artificial Intelligence, dubbed the ‘Magnificent Seven’)

UK economic outlook – outcome from 2023

While the UK economy has faced severe headwinds from inflation, rising borrowing costs and higher taxes, the doom and gloom predictions of both the Bank of England and a slew of international organisations for 2023 proved excessive.

One lesson to be learned from this is that life is unpredictable and short-term market and economic forecasts are very hard to get right. For investors it’s important to focus on the longer term and not get blown off course by trying to second guess the shorter-term outlook.

Equity market outlook

At the headline level:

  • The Bloomberg Magnificent Seven Index - (Apple, Alphabet, Amazon, Meta Platforms, Microsoft, NVIDIA and Tesla) rose an incredible 107%2 in 2023
  • The S&P 500 index – returns were particularly impressive, especially given caution about the outlook at the start of the year. However, this was heavily concentrated in a small number of stocks seen as Artificial Intelligence players. Stripped of technology and communications companies, the rest of the S&P 500 Index returned 6.6%2 and when holdings were equally-weighted basis (rather than weighted by the market-cap of its constituents), the S&P 500 returned a more modest 5%2 rather than 21%
  • US equities – equity market concentration in the US is now at its highest level since the 1970s, with the ‘Magnificent Seven’ representing 28.7%2 of the entire S&P 500 index (as at 26 January). In fact, together their value exceeds the entire UK, Japanese and Canadian stock markets combined. This environment makes it extremely hard for fund managers to beat the index without eschewing the principle of diversification. 

When a market is so narrowly focused on a small number of stocks and one theme in particular (AI) this clearly carries risk, and it remains to be seen whether the rally will start to broaden out or whether the ballooning valuations of the ‘Magnificent Seven’ will continue to make headway or recede.

Good to know – All figures shown refer to the past and past performance is not a reliable indicator of future results.

Look forward – investor insights for 2024

As we head further into 2024, there are reasons to be positive:

  • Inflation is in retreat on both sides of the Atlantic, though the downward journey has seen bumps on the way
  • Interest rates look to have peaked, with financial markets expecting cuts this year, which should ease pressure on consumers and businesses 
  • Bonds remain relevant again and prices could bounce further if rate cut expectations increase
  • In the equity space, UK and Chinese stocks are both very cheap, with recovery potential. Unloved FTSE 100 UK equities are trading at an aggregate price of 10.73 times their forecast earnings for the next 12 months. That's a massive discount to global equities, which are on a price/earnings ration of 16.53 times forecast earnings. It's also a very steep discount to where UK shares have traded on average over the longer run (the median P/E ratio for UK shares is 13.13 times).

Of course, shares can remain undervalued compared to longer-term trends for some period of time so there is uncertainty over how long valuations might remain depressed. 

UK equities have been priced for a recession and over time the potential upside is significant if valuations revert to more normal long-term trends.  

Optimism needs to be tempered with a little caution as challenges remain. While hopes are high that a soft landing can be achieved, recession risks haven’t gone away entirely, as there is always a lag between interest rate cuts and the effect on the real economy. The timing and impact of these is uncertain.

UK mortgages – outlook for the start of 2024

Most UK mortgages are on fixed rates, taken out when rates were ultra-low, so the effect of hikes will come through as new deals reach the market rather than progressively as rates rise. The effect of higher borrowing costs and rising prices has also been partially tempered by the excess savings many households built up during the pandemic, enabling a degree of resilience, but this won’t last forever. Higher borrowing costs will also impact companies that need to refinance.

Political influences for 2024

Politics also looks set to be a key theme influencing markets in 2024, with over 40 countries, representing half of the global electorate, expected to take part in national polls. This includes the US, UK, India and South Africa.

A lot can change over the course of a year, but Donald Trump looks set to be crowned the Republican nominee and is currently polling ahead of Joe Biden for the November US presidential election. A second term in the White House for Trump suggests the potential extension of tax cuts implemented by his administration (these are due to expire in 2025), a possible return to trade wars and the dismantling of much of the current administration’s green agenda.

In the UK, the Labour Party have a commanding lead over the Conservatives in opinion polls. A change of Government brings uncertainty for UK economic policy, though  tax rises and increased borrowing are constrained by the already high tax burden and borrowing costs. At the time of writing, firm policy commitments are scarce, but Labour have pledged to reintroduce a pensions Lifetime Allowance, add VAT to independent school fees and conduct a review the business tax regime.   

If there is one certainty about 2024, it is that there will be plenty to report on. Stay tuned!


1 Lipper / S&P as at 31 December 2023     

2 Bloomberg as at 31 December 2023

3 IBES/MSCI/Datastream as at 24 January 2024

Important information

This article does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. You should always remember that investing carries risk and past performance is not a guide to future performance.

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