By Tim Wishart

In more ways than one, 2023 turned out to be a bit of a let-down, and was generally typical of the ‘turbulent twenties’.

Politically, geopolitically, and economically, we witnessed a lot of flux. Inflation left consumers with fewer pounds in pockets and rising interest rates made mortgages and other household debt more expensive. But the worst economic outcomes were avoided, and the expected global recession did not materialise.

For investors, we undisputedly ended 2023 in a better place than we started. But the recovery has been lacklustre, and the ongoing volatility means we still haven’t found convincing answers to some of the questions facing global investors at the start of this year.

We’re now a month into the new year. With this complicated backdrop in mind, what are the big factors that will be shaping investor sentiment over the course of 2024?

The world continues to be a complicated place and the ‘turbulent twenties’ remains an apt moniker. The US economy is likely to slow further as 2023 rate hikes continue to bite and consumer demand weakens. The big question on everyone’s lips will be, ‘can the US avoid a recession?’ China should start to improve as the government is moving more decisively to stimulate the economy – a failure to reflate would cause problems. We think a global recession will be avoided, but we will see a continuation of low, but positive real growth.

Inflation uncertainty: this will continue to be a dominant theme. At Adam & Company, we think disinflation is likely in 2024. Some excitable investors out there believe the central banks will be quick to slash interest rates in the wake of a drop off in inflation. But we don’t think this will necessarily be the case – we think keeping a lid on interest rates for the time being would be wise for central banks. And we expect to see rate cuts in the UK and US as summer approaches.

The geopolitical framework is brittle and not helped by political and economic volatility. We’re cantering hard and fast towards the US presidential elections, so many of the headlines in 2024 will focus on a ‘will he or won’t he’ outcome regarding Trump. The continuing unrest in the Middle East may also impact investor sentiment, particularly if conflict escalates.

Returns from fixed income markets were very varied in 2023. For most of the year the best thing to have done was to focus on areas less sensitive to interest rates, and instead focus on areas of corporate and consumer credit.

For 2024, inflationary pressures seem to be receding – and inflation affects fixed interest markets in the way kryptonite affects Superman. So maybe it’s not unfair to assume that disinflationary tendencies could reap rewards for investors in the coming months.

What central banks do in response remains to be seen, but if they do cut interest rates, then it could act as a spur to fixed interest markets, including government bonds. Of course, there are two big things that could derail this theory – the upcoming elections, and economic growth (or a lack of it). The biggest risks to fixed interest surround refinancing requirements of governments and companies – the ‘maturity wall’.

Equity markets broadly appear to be fair value, but valuations and sentiment are mixed. The US market remains relatively expensive and earnings optimism for 2024 is hard to believe. Profit margins have narrowed from record-wide levels, but have stabilised – they could improve in 2024. We think that quality equities will perform well and should outperform in a downturn or a recession. We think that interest-rate-sensitive companies could recover in 2024 and we remain positive on healthcare, infrastructure and renewables.

It’s a truism to say the year ahead is always an unknown quantity. But the shock factors of the last few years (the pandemic, the war in Ukraine, rising tension in the Middle East) is testament to the fact that you rarely know what’s around the corner.

Although we all have a go at crystal ball gazing, none of us can predict the future. But given the current environment, taking large risks would be inappropriate and being selective is important. Having a well-diversified portfolio and one that’s well-structured for inflation, higher interest rates and any other shocks that might be around the corner is always the best approach.

Tim Wishart is head of strategy and development at Adam and Company