One of the key questions on investors’ lips as we head into 2024 is when will central banks decide to cut interest rates.
It’s an issue that has become more urgent in the UK after the three main sectors of the economy contracted sharply and unexpectedly in October. The longer rates remain at elevated levels, the greater the impact of their transmission into the economy, upping the risk of a serious downturn. But stubborn inflation is keeping the Bank of England (BoE) ultra cautious.
No one doubts that in 2024 inflation will continue to cool, given the significant ground that has been gained this year, and that this will deliver the turning point in the direction of interest rates. The Federal Reserve is expected to cut first, but most analysts think the BoE won’t move until June at the earliest. Capital Economics doesn't expect a cut here until late in 2024, in part because this battering tool has risen to a lower peak than most models suggest is necessary. That implies Bank rate, currently at 5.25 per cent, needs to stay higher for longer to compensate. But it concludes that rates will fall to 3 per cent in 2025, lower than the consensus 4 per cent rate, with core inflation touching 2 per cent by early 2025. Pantheon Macroeconomics expects UK rates to fall by 75 basis points in 2024 and by 100 basis points the following year.
The line in the sand will be when the Monetary Policy Committee is confident that inflation cannot spark back to life. To guard against that, evidence on wages and consumer prices must be strong and irrefutable.
There is one other factor that might stay the BoE’s hand: the election. To be more precise, an election giveaway Budget. After all, the rising tax burden on individuals has been a gift for its fight against price growth. In fact, that could prove to be the most damaging aspect of a general election next year – a splurge of fiscal largesse to save some seats. Otherwise markets appear calm at the prospect of a Labour victory, given the spending restraints that will apply with the country’s finances in the state they are, whoever is in power.
While it seems inevitable that the US stock market will dominate again, largely down to the strength of its big tech sectors and the buzz around AI and its capacity to deliver exciting productivity gains in the years ahead, it is not unrealistic to expect the harsh valuations applied to so many British companies to be revised, with or without the help of the government. Fading inflation and looser monetary policy in Britain should change the dial on growth and deliver a badly needed boost to listed companies here.
There is a lot of money sitting on the sidelines, and plenty of bargains on the LSE to tempt it in. We should expect investors to act well before the Bank makes substantive progress on the 2 per cent target. Meanwhile Simon Thompson explains to Dan Jones why he thinks 2024 could be a golden year for small cap investing, with depressed prices offering an outstanding buying opportunity.
This rosy scenario may not materialise. Corporate earnings will come under pressure if growth remains anaemic. There is the potential for an escalation of armed conflict, a new energy crisis, a significant result in the US election, and more climate change chaos.
Nevertheless, Adam Hetts at Janus Henderson reminds us that even with the world in a fragile state, and even if in most cycles recessions typically lag peak policy rates by a few quarters or even years, staying out of the market is risky, too: history tells us that even at today’s enticing rates “cash significantly underperforms a balanced portfolio from the start of economic weakness through initial recovery”.
In our special Where to invest in 2024 selection of features we examine the prospects for all the major markets and asset classes, and have elicited the views of expert fund managers, to help you plan for the year ahead. And if you enter our Christmas Quiz you could be the lucky winner of a set of 10 of Harriman House’s best-selling investment books.
It only remains for me to wish you the best of the festive season.
