It’s difficult to look back with satisfaction on 2023 or to conclude that it was a good year for UK investors. The US stock market delivered a(nother) striking performance, cementing its reputation as the pre-eminent market. No one else does it quite like the States. But those gains were concentrated in a small group of extraordinary companies – Apple, Nvidia, Microsoft, Amazon, Tesla, Meta and Alphabet – with their dominance largely the result of excitement over artificial intelligence (AI). Such was the strength of the AI-fuelled rally, the S&P 500 now accounts for around 70 per cent of the global index.
With the true potential of AI yet to be explored, there are many who argue that the Magnificent Seven, and other companies with links to innovative technology, will retain or secure high ratings, if not outperform again, albeit to a lesser extent than seen this year. In any case, broader UK and US markets have already indicated their elation at recent dovish signals from the Federal Reserve and their readiness to take off once rate cuts start. Signs that slowing-down China intends to boost its stimulus measures will help too.
There were other positive developments this year. UK CPI inflation (which climbed to 11 per cent in 2022) spent most of 2023 marching back down, ending the year with a flourish by falling to 3.9 per cent, well below a widely predicted 4.4 per cent. Britain is no longer an inflation outlier. Central banks spent the year nudging rates up and talking tough. But, as in the US, UK bank rate is likely to have peaked, at 5.25 per cent. Recent falls in the rate of inflation are reinforcing expectations that the Bank of England (BoE) will warm to policy easing sooner than expected. Capital Economics points out that on five of the eight occasions since the 1980s, once the Fed has cut rates the BoE has followed suit within three months.
But if some pressures are abating, others remain. The scale of Britain’s national debt (it hit 100 per cent of GDP in June) and the cost of servicing it have increased the tax burden in a way not seen for decades. According to the Institute of Fiscal Studies (IFS), UK tax revenues will rise from 33 per cent of national income at the time of the last general election to 37 per cent in 2024. Jeremy Hunt’s stealth rises through frozen and lowered thresholds might have had a lesser impact in any other period but with wages rising in the face of high inflation and worker shortages, millions are being pushed into higher tax brackets. Investors must endure a few more tax changes in the year ahead with further cuts to the capital gains tax shelter and the dividend allowance. Scottish higher-rate taxpayers will pay 48 per cent on their highest earnings – a rise the IFS describes as equivalent to a 7 per cent hit to their post-tax income – and they face a new ‘advanced’ rate tax band too.
The rate of National Insurance will fall by two percentage points in January, but if next year’s Budget on 6 March contains any further tax giveaways, their purpose will only be as vote-winners. The OBR estimates Britain will be spending £122.5bn a year (in nominal terms) on servicing the country’s debt by the end of the decade. Falling interest rates of course will ease this problem. They may be the only thing that will help, given the slim chance of strong economic growth in the next couple of years.
Economic predictions softened in 2023 with a strengthening conviction that deep recessions here and in the US could be avoided, yet bumpy landings haven’t been entirely ruled out for 2024, in part because history shows that when borrowing costs rise steeply and fast, downturns often follow after a significant time lag.
It hasn’t been the best year for the London market and one of the biggest buyers for British shares is currently companies themselves with around £57bn this year spent on buybacks. The FCA has now published its new proposals for a simplified listings regime that it is hoped will increase the appeal of a London listing.
UK equities still trade at a massive discount to global peers. Discounts have also widened significantly on many investment trusts, but our columnist John Baron believes the gloom and doom has been overdone here, leaving bargains on the table. In addition, he says we should expect one thorn in trusts’ side to be tweezed out soon. Fellow columnist John Rosier ends the year pondering, aptly, a Charlie Munger thesis that “one is better investing in great companies at a fair valuation than fair companies at a great valuation”.
I wish you all a happy and prosperous new year.
