Investment Outlook 2024
The value of investments can fall as well as rise, and you may not get back the full amount you invest. Past performance should not be taken
as a guide to future performance. Eligibility criteria, fees and charges apply. You should continue to hold cash for your short-term needs.
As we entered 2023, US inflation was on its way down after going up for months in the previous year – reaching levels not seen for 40 years. Central banks like the Bank of England, responsible for ensuring the economy doesn’t get out of control, had been putting up interest rates to push down rising prices – and it appeared to be working. For example, in the US – the most important market for global investors – inflation fell from its peak of 9.1% in June 2022 to 3.2% in November 2023.
This all impacted – in fact dominated – the world of investing for much of last year. High interest rates can hit both share and bond prices, so the main question on investors’ minds was: when will they stop going up? In fact, the US recession did not play out and the US equity market rose through the course of the year.
But by November, it looked like central banks’ efforts to rebalance their economies had succeeded and, while interest rates would need to stay higher for longer, they had indeed stopped rising.
This was good news for company forecasts, bond prices and therefore investor confidence, and markets ended the year strong.
Interest rates impact rising prices because they reduce how much extra money people have to spend. The order of events typically goes:
1. Central banks raise rates.
2. Loans, including mortgages, cost more, while savings accounts generate more interest.
3. People have less money to spend and are encouraged to save rather than spend.
4. Economic growth slows.
5. Prices go down as people spend less.
This broadly lays out what happened in the UK, which saw sluggish economic growth last year. But crucially, despite high inflation and interest rates, the US economy stayed remarkably resilient.
A key factor behind this difference comes from mortgages. In the UK, two and five-year mortgages are common, so lots of people had to renew at a higher rate last year. But in the US, you can lock in a mortgage for 30 years, so rising rates affected fewer homeowners.
The US job market stayed strong too, so people had jobs and money to spend.
History shows US stocks tend to perform well the year after the last rate hike from its central bank the US Federal Reserve (Fed), as long as its economy avoids a recession. The experts at Coutts, the bank behind our investments for customers, think it’s possible the US could avoid such a downturn this year. And even if it does have a recession, it may well be quite mild.
As for bonds, now that it looks like we’ve reached the peak in interest rates, what central banks do next will be very important. Bond yields (the fixed income you get from a bond) and their price (how much you can buy and sell them for in markets) have an inverse relationship. If yields go up, prices go down.
The table below shows what could happen to bond prices if yields change. At the time of writing, US government bond yields are 5%. So if US government bond yields were to go up by 1% over the course of a year, the 12-month return on the bond (including coupons) would be expected to be -2%. However, if yields fall by 1%, the 12-month return would be expected to be 12% - a considerable figure. So what happens with interest rates this year will play a big role on bond returns. On balance, we expect yields to fall further – and prices to rise – this year.
