In some ways, 2024 will be a continuation of the emerging patterns we have seen in 2023 across many industries. It can potentially be a year of two halves where we see the effects of high inflation and interest rates waning as many central banks take measures to increase growth.
Lets explore the some of the main themes for the year ahead.
Recession: Will There be a Recession
Talks of a recession do not seem too far from us and wherever you look, there are signs of slowing growth. Different aspect of the economy at different times have indicated slowing growth but to determine with some certainty if there will be a recession, we need to look at the factors that may determine this.
The experts are saying there is a high possibility of a recession or at least significant economic slow down. When it comes to the possibility of a recession, the question is how deep and how long will it last.
Inflation and Interest Rates
The Inflation and Interest Rates are potentially key to determine if there will be a recession and if a recession happens, the decisions taken be the Central Bank to manage it will also depends on these values at least.
To fight high inflation, the Central Bank raises Interest Rates and when that happens, business and individuals struggle in many ways.
As Inflation falls, the Central Banks may cut Interest Rates and as that happens, the expectation is that there will be economic growth as a result of the cost of borrowing falling.
Businesses can borrow (at a much lower cost) for reasons that suit them and individuals can borrow for consumption or buying assets – as we recommend.
The last twelve months have been quite interesting as we have seen the fight against inflation. Some countries have done better than others as we can see the Fed in the States have managed to get inflation closer to their target.
There is an expectation Interest Rates will be cut by the Fed at some point in the first half of next year – promising indeed. Real question is what asset classes or sectors should we pay attention to?
In Europe, Core Inflation (which is the change in the cost of good and services, excluding those from Energy and Food) has been a bit more challenging to deal with but there is progress in the right direction.
In the UK inflation is slowing but the BOE are yet to confirm if rates will be cut in 2024.
The main takeaway here is to seek out opportunities a high inflation environment provides, the impact of the Central Bank cutting rates to boost growth and the opportunities that will come from that. The opportunities that existed when inflation was high will change as inflation
The Housing Market
2024 is an election year and this has the ability to shape expectations for the coming year. A drop in inflation and possibly Interest Rates are a signal that things are heading in the right direction. That being said, a reduction in interest rates does not necessarily mean it is cheap enough to borrow.
A number different factors will determine what will happen to house prices in certain areas. Fundamentally if it is not cheap to obtain credit, then spending will be reduced in the economy to a large extent.
Across the UK there is a housing shortage and politicians have promised to do something about it. Studies have shown that the minimum number of homes that need to be built each year are not met. Read more the report here.
A reduction of Interest Rates will make buying and building homes more appealing since a large aspect of that process requires borrowing money.
Home sellers may be in a tough spot since millions of homes may come on to the market as fixed interest rates come to an end and the owners may choose to sell rather than refinance at a much higher rate.
More homes on the market present opportunities for first time buyers and investors however, Lenders are more strict with affordability and valuation values so this not a guarantee that homes will be bought or sold in a reasonable time frame.
Renters will continue to bear the brunt as there is a shortage of homes and if borrowing costs stay high, there will be little incentive to make homes available for rent.
The Broader Financial Market
With changes to Inflation and Interest rates, there will be ‘movement’ in the Stock and Bond market.
The actions taken by the Fed will have an impact on Bond yields and includes Government, Corporate and other bonds.
It is an election year after all and the policies of the potential candidate will have an effect on the that market. Are they going to raise taxes? Will they take a different approach when dealing with Trade Partners?
There are a number of things to consider when you think of how the market may perform and it is worth noting inflation and interest rates are not the only factors.
Geopolitical Issues: New Emerging Order
The conflict in Ukraine has not ceased and in the last year has intensified somewhat. New conflicts such as the Israel-Hamas war, the instability around the Red Sea has created a murky picture.
What we can deduce is that some conflicts have a much bigger impact on the market than others. Attacks in the Middle East around the Red Sea may have an impact on the price of Oil and could lead to more instability in the area.
The export of grains and crops produced in Ukraine has been impacted by the conflict and the impact continues. The conflict introduced volatility in the Energy and Commodity markets.
On the political side, emerging powers have seized these conflicts as a opportunity to be mediators. On one hand it can be seen as the waning of the current power on the other hand, other countries a rising up are a looking to wield influence in the geopolitical sphere.
Artificial Intelligence
Artificial Intelligence has gained traction this year and is set to continue in the years ahead. In different aspects of this space, investment is increasing along with interests and the risks that come with new technological advancement,.
Nvidia stock performance is testament in a way to how enabling AI and the different ways it is applied is creating more opportunities for growth. There are some strong performers in the Semi Conductor space – check these names out.
The AI battle among the big tech companies is taking shape with each of them having their version or application of Large Language Model (LLM) i.e ChatGPT, Bard, etc.
Cyber security concerns introduced by AI especially in an election year will come to the fore. While disinformation is not a new tactic, using AI tools, one can spread more lies, much quicker than they can be verified and this can have interesting implications.
