Economic Performance & Outlook

Remain focussed on long-term objectives as outlook changes

Our readers over the past two years will have noticed a spotlight on inflation and interest rates. Over this period, the investment world has been somewhat in flux, with the exit from the pandemic seamlessly leading us into inflationary pressures not witnessed in the western world for many decades. The reaction of central banks has been to push up interest rates to keep a lid on that inflation. While the purpose of higher interest rates is to dampen economic activity and thus bring down inflation, there’s always a risk that the doctor may prescribe too much medicine and that those interest rates may in fact torpedo the economy and cause a deep recession.

For now, that risk seems to have abated, and inflation in both the US and Europe has been brought largely under control without significant damage to the economy. In the US there seems to be every evidence that the economy is just fine. Lower inflation – now just 3.1 per cent – led the US Federal Reserve to indicate in December that it believed it had reached the peak in terms of its interest rate cycle, supporting market predictions which estimate that the Fed will cut interest rates by about 0.75 per cent during 2024. The European Central Bank was more circumspect, suggesting that there’s still work to be done to reduce inflation. Overall, the global picture looks more positive than anticipated a year ago.

What does this mean then for the future? Before interest rates shot up in 2022, we had lived through about 40 years of extremely low inflation and consequent low rates – this had the effect that the yield on such securities as the German bund was below zero, making them uninvestable for many. It also led to very strong inflationary pressures on asset prices as cheap money went looking for a reasonable return.

The question for now is whether we are reverting to a period like this or whether inflation and interest rates may stabilise at higher levels, similar to the period between 1950 and 1980. Our view is that inflation for the moment will probably fix at a higher rate than the very low figures seen between 2000 to 2020 and that interest rates will therefore remain at higher rates than we have experienced as well. With the prospect of higher yields on fixed income and less upward pressure on asset prices, this opens up possible new approaches to investing for the next few years, different from what was appropriate in the first two decades of this century.

Fixed Income

Bond performance over past year
All bonds 10+ years, 03/01/2023 – 02/01/2024, local pricing 

The sentiment in fixed-income markets seems almost to have reversed in December from just a couple of months beforehand. In October the yield on the benchmark US 10-year Treasury bill crept above 5 per cent, a 15-year high. The rationale for this was a combination of factors: pessimism that the central bank was struggling to contain inflation which meant interest rates would stay higher for longer, damping the worth of existing debt securities; fears that the US was borrowing too much; and the unpredictable state of US politics, where a continuing impasse between the Democrat White House and Republican-led House of Representatives is giving the impression that the world’s largest economy is becoming unmanageable.

Fast forward to December and all of that seems forgotten. As mentioned above the general consensus now is that the US has managed to keep a lid on inflation without sinking the economy, the so-called Goldilocks scenario. As a result, yields have now dipped below 4 per cent, and with yields moving inverse to prices, that has brought significant gains for holders of these securities. The yield on the equivalent German government bond has fallen from near 3 per cent to circa 2 per cent.

There is now every chance that the real yield that investors will receive – the difference between what bonds are paying over and above inflation – will be positive, making fixed-income securities much more attractive than they have been for a very long time.


Equity performance over past year
30/12/2022 – 02/01/2024, local pricing

Equities and fixed income often move in opposite directions – as economic optimism improves, investors plum for equities and eschew the fixed payments of bonds. As the outlook worsens, investors will exit more precarious stocks for the security of fixed income from relatively solid institutions such as governments. That inverse relationship has most definitely not taken place over the past couple of months, as equities tracked bond valuations higher.

The reason for the support in equity prices is exactly the same as that driving forward bonds, albeit from a different angle. The consensus has been spreading across markets that we are now at the interest rate peak, having managed to slow down inflation without slowing the economy to any great extent. Indeed, as pointed out, the US has posted extremely strong economic numbers of late – gaining 199,000 jobs in November.

As a result, the US benchmark S&P 500 index climbed by about 25 per cent in 2023. In Europe the Stoxx 600 index climbed 13 per cent in the year. All of this is impressive, but we find it hard to explain the comparative strength of equity markets since 2022 and looking into 2024 it’s hard to see the positive news that will push markets higher again.

Euro cash

The last year has seen a profound change in short-term interest rates in the Eurozone. After quite a long period when prime rates were negative, the onset of inflation has seen the ECB raise its benchmark deposit rate to a positive rate of 4 per cent.

As a result, yields on short government bonds sit at about 3 per cent. Since inflation has now dropped to around 3 per cent in Europe, deposit rates have become much more attractive.


Property in general has longer cycles than the equity market which can make it useful as diversifier. We believe European property has a positive long-term outlook as it is coming from a period of rental weakness, although there may be short-term declines as interest rates on bank borrowings rise and the prospect of a recession remains.


Commodity performance over past year against equities

03/01/2023 – 02/01/2024, US dollars

The oil price as of late has been difficult to predict – fears about the war in Gaza initially led to concerns that that might put pressure on supply in the Middle East, however this failed to materialise and prices haven’t seen the gains predicted. That said, recent ructions over supply through the Red Sea may reawaken concerns about the ability to deliver oil from the Middle East to the rest of the world. However, the volatility of commodities in general means that for most it is best left to serious risktakers.

Hedge Funds

Hedge fund performance over past year against equities

31/12/2022 – 31/12/2023, US dollars, hedge funds priced monthly

Hedge funds can make an appropriate investment because of their defensive qualities in a market downturn but generally incur high management fees and tend to underperform during bull markets.

Currency Funds

These funds have shown gains and losses recently. They are useful as a diversifier because of the relative independence from other securities but can experience significant volatility over the short term.

Multi-asset Funds

There is little useful information with which to assess these funds for their performance, but many have struggled to deliver on their stated investment objectives (typically cash plus 4 to 5 per cent, or 2/3rds of equity performance). Because of the very wide range of investments they hold, they provide useful diversification, and the ability to dynamically shift asset allocation can provide some protection in times of equity market corrections. Their inability to deliver strong returns over time, the typically high fees associated, and the increasing ability to earn positive returns from cash and bonds, however, means we are now advising clients to reduce their allocations to multi-asset funds in favour of lower cost investments.

Senior loans

These floating-rate sub-investment rate securities offer a premium over cash and are useful for diversifying a portfolio.