Tom Quicke: Hello, and welcome to our Charities Team video update. And I'm joined by John Wyn-Evans, Head of Investment Strategy at Rathbones, incorporating Investec Wealth and Investment, to talk about the outlook for markets as 2024 gets underway.
John, welcome. It's clearly been a challenging few years for investors as high inflation and rising interest have taken their toll on asset class returns, but the final two months of last year I think gave investors some optimism for the road ahead. Has this market optimism flowed through into 2024 or should some caution be maintained?
John Wyn-Evans: Thanks Tom. And yes, as you say, the last couple of months of 2023 were exceptional really, from a market performance point of view for both bonds and equities. And the key to that really was the market looking forward to interest rate cuts in 2024. Now, it may well have got a little bit ahead of itself perhaps, but one of the key points here is that inflation has definitely peaked.
It may not come straight back down to the central bank's 2 percent target as fast as they would like. But certainly it's heading in the right direction. There may be the odd months, where you get a bad number or whatever, but there's no doubt about the fact the trend is in the right direction.
So that allows the Central Banks to think about starting to cut rates. But again, they're going to remain vigilant. They're very aware of the risks that we might have another outbreak of inflation as we did in the 1970s. And certainly the Federal Reserve chair Jerome Powell always wants to be remembered now as Paul Volcker and not as Arthur Burns, who was the chair who let that inflation rip again in the second half of the 1970s.
Tom Quicke: And I think I'm right in saying that markets are currently looking at about 150 basis point cuts in interest rates in the US and a similar amount probably in the UK by the end of the year. When are we likely to see these rates start to be cut? And how much of it is already priced into market expectations?
John Wyn-Evans: Yes. If you just look at what the futures market is saying right now, they're effectively saying that the UK and the US will start cutting in May and that Europe might actually go slightly earlier and there's a weaker economy there. So there's good reason for that. And the market's saying April for them. It's definitely going to be in the first half of the year, one would think at this juncture.
In terms of the scale of cuts this year, I'd be slightly wary about looking at what futures prices are saying and expecting that to happen. As you say, maybe one and a half percent of rate cuts priced in, in all of those territories right now. But that is the sort of average of all the futures positions, and basically also takes into account these sort of tail risk hedges that people have in, should things get worse and there's be a recession.
So I would say, be careful what you wish for. If interest rates really do go down that far and that fast, that probably means the economic outlook is worse than people currently think. So you can't have it both ways from that point of view. But certainly, the fact that inflation is low, it gives the Central Banks the chance to cut rates. It does mean that they can be more supportive, certainly, if things do slow down a little bit more than expected.
Tom Quicke: And you mentioned the economic outlook just there. What is the outlook looking like, and are we likely to see much in the way of corporate earnings growth this year?
John Wyn-Evans: The outlook is still murky, I think it's fair to say. In Europe and in the UK, the economies are essentially flat. Somehow by hook or by crook, the UK has avoided going into recession, even though every other month is negative on the GDP prints at the moment. Germany is already in recession, for example. And the U S is really the outlier amongst the major developed economies by the fact that it's still growing at a reasonable pace - close to 3 percent last year. The census forecast for the US this year is in the sort of 1 to 1. 5 percent range. But so far, it looks like it's got rather better momentum than that, and certainly consumers in the US have managed to remain stronger perhaps than people expected.
The outlook then for corporate earnings that flows through from that - right now, there's no doubt if you look at the S&P 500 in the US, a lot of the heavy lifting is being done by those big technology stocks. I think a lot of the onus is on them to continue to monetise the shift to the cloud and AI and such. I don't think there's going to be any major problems there, but whether they can really continue to accelerate from these levels is a bit more of a question mark.
Tom Quicke: And turning elsewhere to bond markets, bond prices have clearly been quite weak over the last few years which has meant bond yields now look quite good relative to more recent history. Do we continue to see value here?
John Wyn-Evans: Not as much value as there was at the end of October last year. Certainly that was looking really good value at that particular point - getting some proper real yields on 10 year bonds again, particularly the US where the real yield got up to about two and a half percent.
We're now back under two in the US and around half a percent or so in the UK. So they're not quite as attractive as they were. And also, if we look at 10 year bond yields relative to prospective nominal GDP growth as well, it's fair-ish value, I would say, at this particular point, but I guess the key thing is, at least with those extra yields you've got now, they can play a better role in the portfolio in terms of protecting you against the risk of further economic weakness. And should the growth surprise to the upside and not be too inflationary as well, then on the other side in the balance portfolios, your equity should do pretty well too. So I think from a balanced portfolio perspective, they're a much better component now than they would have been a couple of years ago.
Tom Quicke: Thank you. And finally, geopolitical risk seems to be increasing. We've got upcoming elections obviously this year in much of the world, Middle East conflict, possibly escalating Russia, Ukraine not resolved. Whilst these risks are often very difficult to forecast, how much investors be trying to play them out within their portfolios?
John Wyn-Evans: Yes, geopolitical risk is always with us. And I think it's amplified these days by media, social media, such so that maybe we worry about it more than we should. But it's fair to say on all these risks that you mentioned, they're all quite different in their own way. They're all idiosyncratic. What happens if China invades Taiwan will be very different to what happens if there's a conflagration in the Middle East, for example. So covering your positions with just one simple insurance policy is not always that easy.
Usually, when things do go wrong in the world, the place the world runs to is the US dollar cash. It always likes that. Gold is another reasonably tried and trusted safe haven. It's been a good performer recently, I think, against the background of what's been a strong dollar, and rising bond yields and interest rates, and the falling back of inflation. Some might have expected it to be much weaker than it has been. So actually, I think it's telling you a story about underlying support for gold. And certainly, if you do get some greater global stress, it should do well.
In terms of the elections, I would be not particularly exercised about the UK general election, which is likely to happen this year. If only because both parties are not very far from the centre and keep on stealing each other's policies. So I don't think there's going to be a big shift in the direction of UK politics after the election.
Obviously, the US is a very different situation where there's massive polarisation between the Republicans and the Democrats. And there could be some very different policy turns depending on who gets into the White House. And I think as we near November, assuming that Messrs Biden and Trump are actually still main candidates by then - it's not entirely implausible they won't be - then we could see some volatility develop ahead of that.
Tom Quicke: Super. John, thank you very much for joining us, thank you.
John Wyn-Evans: My pleasure. Thank you.
