January 2024

Happy New Year. As we step into 2024, I hope it proves to be a great year for you and your loved ones. The onset of a new year often prompts reflection and renewal. At Acuvest, we hold a deep belief in the significance of four pillars in life: Family, Friends, Health, and a Sense of Purpose. Recent events have reinforced this belief for me.

The passing of my father, who was 80 and had been suffering from Alzheimer’s, was one such event. His death brought mixed emotions – grief intertwined with relief. During this period, surrounded by family and friends, I observed our conversations invariably circling back to stories that reinforced the importance of these four key elements of life.

Another source of reflection was a Netflix series titled “Live to 100: Secrets of the Blue Zones”. This documentary explores regions where people commonly live past 100 and aims to unravel the secrets of their longevity. The series echoes our four pillars, emphasising not only health through diet and exercise but also the vital roles of community (family and friends) and purpose.

In our work with clients at Acuvest, we see our role as enablers, helping people maximise their life experiences. While we apply our expertise to guide investment decisions, our approach also helps clients prioritise what’s truly important to them and their loved ones. We strive to facilitate life choices where finances serve as a means to an end, not the end itself.

2023 – A Surprisingly Good Year for Investors

Thanks to a strong turnaround in sentiment over the last two months of 2023, the year ended up being a very good one for most investors.

Month and YTD Market Numbers

Reflections on 2023

My reflections for 2023 – which I outlined last month – are repeated below for your convenience:

  • There was significant progress in reducing inflation, from 9.2% down to 2.9% (in the Euro area).
  • Interest rates saw a sharp increase, with the Euro policy rate rising by 2%, but this increase appears to have reached its peak.
  • Globally, economic growth continued to decelerate. The US economy displayed unexpected resilience, the Eurozone’s economy began to plateau, and China, after an initial post-Covid surge, showed weakness.
  • Equity markets, though volatile, ultimately delivered strong returns, driven by the ‘magnificent seven’ and despite a regional banking crisis in the US during the spring.
  • AI emerged as a key factor boosting the ‘magnificent seven’, signalling the start of a new era in productivity enhancement.
  • The bond market, while experiencing volatility, ultimately yielded positive returns.
  • In the geopolitical arena, the Ukraine conflict saw some initial progress for Ukraine but has since evolved into a stalemate, with global attention seemingly waning. The Hamas-Israel conflict added to geopolitical risks and has so far remained localised without tiggering significant broader international involvement.

The following table (courtesy of JP Morgan) shows the return to a Euro investor for investment in the main asset classes. The 2023 numbers are strong. The point of the chart is that it can be difficult to predict what asset classes will do year to year. For example, hedge funds and commodities topped the table in 2022 and are at the bottom for 2023. This highlights the benefits for most people of not having all your eggs in one basket, ensuring you understand the assets you are invested in, and having a process of ensuring the risk in your investments stays in line with your strategy as asset values and market conditions change over time (also known as regular reviews & rebalancing).

Asset Class Returns: 2015 – 2023

2024 is a Significant Election Year

Almost half the people on the planet are due to go to the polls this year, making it the biggest year ever in terms of elections. Taiwan, Russia, India, South Africa, Mexico, parliamentary elections in the European Union, US presidential election … to name but a few. In the UK, Prime Minister Rishi Sunak has said he expects to call a general election “in the second half” of 2024. Ireland’s next general election is due by March 2025 but could yet happen this year should the Taoiseach decide to go to the country early.

Inflation Issue Mostly Dealt With?

In December, the Euro area witnessed a slight uptick in inflation, reaching 2.9% from November’s 2.4%. This increase notwithstanding, there is a growing consensus that central banks have been largely effective in curbing inflation and steering it back towards the 2% target. While current levels are still significantly above the 2% target, it is likely that, barring any significant unforeseen events, inflation may become a less dominant concern in the financial markets for 2024.

Central Banks at Peak Policy Rates and Attention Turns to Rate Cuts in 2024

At their December meetings, Central Banks kept policy rates steady, as anticipated . The market concluded 2023 with a sense of optimism, anticipating potential rate cuts as early as March 2024. However, the onset of 2024 has led to a shift in these expectations. The market now acknowledges that Central Banks are inclined to maintain the current rates for the time being. Consequently, the anticipation of rate cuts has been pushed to later in the year.

Higher Rates Means Better Cash Returns Available

With the rise in interest rates during 2023, investors are now presented with more attractive cash return opportunities through regulated Money Market Funds. These funds aim to align their returns with the Euro Short-Term rate, currently at 3.9%. Additionally, the anticipation of rate cuts later in the year further strengthens the investment case for government bonds and investment-grade corporate credit bonds.

Equity Market Performance 1.1.22 to 31.12.23

The strong recovery of equity markets in 2023 means that the global equity market has now recovered the losses of 2022. The optimism priced into equity markets may yet be challenged.

Our Investment Outlook

While 2023 ended on a positive note, our outlook for 2024 remains cautious. This stance is influenced by several factors:

  • Ongoing Geopolitical Risks: These risks are significant and potentially underappreciated by the markets. The prevailing assumption is that the Ukraine conflict will neither conclude nor escalate markedly in the near term, and tensions in the Middle East will remain localised.
  • Impact of Higher Rates: There is a concern that higher interest rates could eventually have a detrimental effect on businesses and consumers.
  • Mixed Economic Indicators: While indicators present a varied economic landscape, the overall projections suggest a continued slowdown in 2024.
  • Inflation Dynamics: Despite recent improvements in inflation figures, there is always the risk of inflation proving more sticky.

Therefore, market volatility is likely to persist until there is greater clarity on: (a) the resolution or progression of geopolitical risks, (b) a consistent reduction in core inflation to the 2% target, and (c) the extent and duration of economic slowdowns.

Overall, these factors underscore the need for a measured approach to investment in the coming year.

For short-term investors, this remains a market to be avoided, but for our clients who are long-term investors, we continue to advise them to follow their plan and use market weakness to build on positions.

John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.