Year End Insights

A year can span a significant duration, and this one concluded with a much-appreciated Santa rally. Consequently, globally diversified investment portfolios like ours, typically managed for clients, have generally surpassed standard cash rates and consumer price inflation. Portfolios with a higher risk and equity focus, in some cases, have potentially doubled these returns.

The market’s holiday surprises were essentially shaped by central bank figures. Though Andrew Bailey and Christine Lagarde played smaller roles compared to Jerome Powell, they at least refrained from diminishing these benefits. On Wednesday, the US Federal Reserve (Fed) maintained stable rates, yet market responses resembled those to a rate cut announcement. Expectations for future rates plummeted, with an initial 0.25% rate decrease anticipated by May, followed by five or six subsequent cuts in 2024. Just last Friday, forecasts suggested a first cut in June and three to four cuts throughout the year.

Jerome Powell’s evolving rhetoric during recent Federal Open Market Committee (FOMC) meetings has significantly altered market perceptions, despite no actual rate adjustments. His influence has grown, with investors closely following his statements, reminiscent of Alan Greenspan’s impact in the 1990s.

Powell noted a reduction in inflationary pressures and an unexpectedly balanced employment market. With the unemployment rate dropping from 3.9% in October to 3.7% in November, this was a key declaration. Earlier this year, Powell estimated the non-inflationary unemployment rate at 4.5%, suggesting a revised FOMC perspective on what constitutes ‘balance’.

It’s also noteworthy how the interconnected nature of money markets means that, currently, the European Central Bank (ECB) and the Bank of England (BoE) influence domestic rate expectations less than the Fed does. Both had meetings on Thursday; despite no rate changes and only slight narrative shifts from previous meetings, rate expectations fell before the meetings and remained low.

Andrew Bailey hinted at progress in combatting inflation. This isn’t surprising, given the UK’s overall sluggish growth and a -0.3% growth in November, potentially indicating a slight contraction in this year’s final quarter. However, sector disparities persist; services are stable, but manufacturing is declining again, as indicated by the CIPS/S&P Global purchasing manager index (PMI) reports. The services PMI rose sharply to 52.7, signalling reasonable growth, but the manufacturing PMI fell to a concerning 46.4, signalling contraction.

In Europe, this pattern held until recently but has now worsened, with both manufacturing and service PMIs declining. Despite the Fed’s dovish stance, investors still see the ECB as the most likely central bank to cut rates first, closely followed by the BoE.

Additionally, the UK’s housing market is experiencing a rebound, with 5-year fixed-rate mortgages dropping to around 4.5%. Housebuilders have surged over 17% since the last quarter’s start, outperforming other sub-sectors. This trend isn’t limited to the UK; global regions are also seeing a rise in house prices.

Next year promises political drama, ideally of a positive nature resulting from smooth democratic processes. Major elections are scheduled in various countries, including the US. In this context, central banks, post a significant inflation episode, might exercise caution, particularly during times of intense political discourse. This doesn’t imply bias or self-interest from central bankers, but rather a less confrontational approach and potentially swifter action if inflation, especially wage inflation, permits.

Following the Fed’s shift in sentiment, equity markets have largely enjoyed a positive week, except in China. The country faces a crisis of confidence partly due to its autocratic system, as recent reports suggest political purges akin to Stalin’s era. The reality is uncertain, but it’s hoped that China can soon reverse this downturn, restoring confidence and economic optimism in what remains the world’s second-largest economy.

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This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.

Please note, past performance is not a reliable indicator to future returns. Your investment may fall as well as rise, and you may not get back what you put in.