Wesleyan’s Director of Investments, Martin Lawrence, looks back on investment markets in January, and provides an overview of how some economies around the world are coping with continued inflationary pressures.
After the initial coordinated attacks by Hamas on neighbouring Israel back in October 2023, investors had become 'all too' comfortable that the conflict in the Middle East had been relatively contained - causing markets to rise towards the end of the year.
That view was challenged in January 2024, as bomb blasts in Iran at the start of the month, and drone attacks on a US base in Jordan later in the month, caused markets to reflect on such complacency.
Attacks on ships in the Red Sea have led to renewed concerns about supply chain bottlenecks which caused a temporary spike in oil prices and forced global markets downwards.
However, by the end of January they had recovered somewhat, albeit not quite back to the highs seen in the closing two months of 2023, for some. For example, in the UK, markets jumped 5% in December but finished January with modest losses at the start of the new year.
Other news in markets caused investors to be concerned about Chinese economic growth, which in turn caused Chinese and Hong-Kong stock markets to fall. This had little effect on US shares which were busy hitting new ‘all-time’ highs of their own.
This optimism stemmed from expectations that the Federal Reserve would soon start cutting US interest rates, together with some renewed enthusiasm for the shares of companies linked to the development of Artificial Intelligence.
Inflation levelling and a rise in UK house prices
Inflation in the UK levelled off in December with headline CPI nudging higher unexpectedly to 4%, (the first increase in 10 months and up from 3.9% in November). Core CPI (which strips out some of the more volatile components that make up headline inflation such as the cost of energy) was left unchanged at 5.1%.
Despite the move upwards in headline CPI, we believe inflation will continue to move downwards but perhaps not noticeably until later this spring as some of the original causes of inflation that happened in 2023, fade away.
Looking into some of the detail behind the headlines, the British Retail Consortium reported that ‘food price inflation continued to decelerate in January’ and we note that it has now more than halved from the painful peak of 15% endured by households in the months leading up to April last year.
The Achilles heel for the UK remains wage inflation and the latest figures from the Office for National Statistics for September to November 2023, showed regular wage growth was still uncomfortably above 6%.
House prices began 2024 on a more upbeat note, according to Nationwide Building Society, who reported that month on month in January, UK house prices rose 0.7%. Furthermore, for anyone looking for a mortgage, there are some encouraging signs that mortgage rates are continuing to trend downwards.
This is helped, in part, by investors taking the optimistic view that the Bank of England will start to lower rates at some point.
Economies - home and abroad
Growth in the wider UK economy was better than expected in January, and there is still a chance that the UK can avoid a technical recession (defined as two consecutive quarters where an economy goes backwards). On the latest numbers, the UK economy shrank very marginally in Q3 2023, so we await the figures for Q4 knowing that another fall would 'tick that box'.
But is a 'tick box' exercise only useful for news headlines? At the time of writing, we know that the economy shrank in October 2023, but grew in November - so it will be a close call.
In reality though, the nation will decide for itself about the state of our economy as each and every one of us sees our personal financial circumstances differently. Economists, can, after all, only talk in 'aggregate terms' for the nation as a whole.
Talking of the nation, it was pleasing to see UK consumer confidence surveys continue to improve after being crushed back in 2022 by the prospect of substantially higher interest rates. The latest Deloitte Consumer Tracker shows that consumers are ‘feeling significantly more confident in the state of the economy in the UK’ – improving 32% compared to a year ago.
Abroad, it’s been a struggle for the economies of Europe too. Overall, however, Europe looks to have avoided falling into recession at the end of 2023 - but only just, if initial readings prove correct. Falling headline inflation figures in Europe have been impressive in recent months but, like the UK, stalled in December 2023.
More reassuringly, provisional estimates for January suggest that core inflation (as explained earlier) has drifted down to 3.3% in Europe. This helps to explain why the European Central Bank should be able to begin cutting interest rates by the time summer arrives.
Headline US inflation at 3.4% proved higher than expected for December 2023, but the underlying measures give us little reason to worry. Unlike the UK, US retail sales proved strong in the month.
Early readings for the US’s January’s economic health (based on the widely watched Purchasing Manager Indices) suggested a strengthening economy, without any major inflationary concerns. Fourth quarter economic growth (Gross Domestic Product (GDP)) proved far stronger than expected.
This economic 'Goldilocks' scenario (where an economy is running neither too hot, nor too cold), enabled the Federal Reserve to leave US interest rates unchanged at their last meeting. The minutes from the December meeting confirmed that US rates were ‘at or near’ their peak.
However, it seems there was no immediate hurry to cut them given that it wasn’t that long ago that the view of ‘higher for longer’ was the inseparable bed fellow for the world’s largest economy.
The health of the Chinese economy has been a source of concern for investment markets, due to the wider implications for global economic growth. However, some of the data for December 2023, and January 2024, has suggested some stabilisation within the Chinese economy, if not signs of modest improvement.
Core inflation in China has been below 1% for almost two years and headline inflation is negative (meaning prices are actually dropping) which is in stark contrast to what we are enduring in the UK and in other developed counties in the western world.
What it means for our funds and outlook
China is an area that has always interested us as long-term investors and, given valuations now appear far more attractive, we have been looking for ways to tap into this future growth potential, and not just in China but also the wider region.
We are always mindful of governance concerns for this part of the world, and, of course, will abide by our sustainable investing principles. Japan is another example of a country we monitor closely, not least because we finally expect them to be able to exit a prolonged period of negative interest rates at some point this year.