The economics
As we look ahead, it is briefly worth reflecting on how we did in 2023 to assess whether there are lessons for our year-ahead predictions. For my part, I give myself a pass on the inflation view although it perhaps decelerated even more rapidly than I anticipated. In my year-ahead predictions a year ago I suggested that “calls for interest rate cuts will build. Central banks are unlikely to heed these calls, and maintain policy tighter than might be justified by economic conditions.” That is not too far off the mark: There are concerns in the euro area and the UK that central bank tightening has gone too far, which in turn is crimping growth and is setting us up for a difficult 2024. Markets are convinced that central banks will cut rates as inflation remain quiescent – a view with which I agree although it will not be sufficient to give much of a growth boost this year.
Indeed, although my suggestion that the industrialised world would experience a recession in 2023 proved wide of the mark, we are far from out of the woods. The energy price shock was expected to be a catalyst for a growth slowdown a year ago but in the event both the US and European economies avoided the worst case outcomes. Today, however, the catalyst is more likely to be the lagged effects of monetary tightening over the past two years. Real interest rates in the US and Europe turned positive in late-2023 and are likely to remain relatively high over the first half of 2024. In addition, many firms and households have been protected from the full impact of recent rate hikes by fixed-rate borrowing agreements. US property investors and UK households whose fixed-rate deals have to be renewed in 2024 could find themselves having to shell out considerably more in debt servicing costs, which will take the edge off activity. Whether or not the US or UK experiences a recession is less important than the likelihood that growth will be considerably slower in 2024 than in 2023.
2024 is shaping up to be a big year for elections and they do not come any bigger than the US Presidential election which takes place in November. It seems almost certain that we will see a rematch of Trump versus Biden, barring the intervention of the courts or unforeseen health issues. I would not like to put my money on who will win, although for the record the bookies currently offer shorter odds on Trump. However, one thing is certain: This will be one of the nastiest election campaigns ever fought. It is not too much of an overstatement to suggest that the future of the western alliance hinges on Biden getting back into the White House. Europe has already experienced the capricious nature of Trump’s foreign policy and America’s global standing would not emerge well from a second Trump presidency if he uses his term to settle old scores.
This is particularly problematic in view of rising geopolitical tensions: The Russia-Ukraine war will enter its third year in February and a Trump presidency would seriously imperil the flow of materiel to Ukraine (although this would likely only become an issue in 2025). Similarly, the Israel-Hamas war will require deft diplomacy to prevent it spilling over into a wider regional conflict. Just because it did not immediately ignite following the events of October 2023 does not mean that the risk of a wider war in 2024 can be ignored. Then there is the China-Taiwan problem. Later this month, the Taiwanese presidential election is expected to see Lai Ching-te (aka William Lai) of the Democratic Progressive Party elected to the presidency. In the past Lai has been aggressively pro-Taiwan (and by definition, anti-China). Although he is likely to be more circumspect in his comments as president, he is distrusted by China and we can expect a ratcheting up of pressure from Beijing. This will be a further headache for the US policy establishment, which will be distracted by electoral considerations in 2024.
The US election is not the only game in town: There will also be plebiscites in a number of important economies such as India, Indonesia and South Korea. It is also highly likely that there will be an election in the UK. Although legally it does not have to take place until January 2025, the smart money is on an autumn 2024 election with one prominent Labour politician recently suggesting that it was “the worst kept secret in Westminster” that a contest would be called for May. The result is rather easier to call than in the US – there is almost certain to be a change of government in the UK in 2024. Much of the discussion centres on how big Labour’s majority will be. Electoral Calculus reckons that Labour will gain a 133 seat majority which would be way bigger than Tony Blair’s government achieved in the 1997 landslide win (an 88 seat majority). For the record, I do not think that Labour will come remotely close to such a majority. In order for this to happen, the Conservatives’ vote would have to halve and Labour’s spike to record highs. I would be amazed if the majority is as high as 50 and would not be surprised if it was as low as 10 seats.
Markets in 2024
2023 was a better year for investors than 2022, when returns on both bonds and equities were negative. A so-so 2023 was transformed in the last couple of months when the S&P500 rallied by 14%, delivering a 27% return for the year – the best since 2019. Global fixed income also ended the year up 6%, having been down 4% in mid-October. The catalyst for the surge was expectations of US rate cuts in 2024 which, if delivered in line with expectations, suggests that most of the good news is already in the price. Doubtless the momentum will continue over the early weeks of 2024 and markets will exult that bonds really are back. If the US economy manages a soft landing, as is increasingly anticipated, there is scope for equities to go higher still. My own view, for what it is worth, is that the bulk of the gains will be generated in the first half and it may pay to go defensive later in the year as the rally runs out of steam.
What else?
AI was one of the buzzwords of 2023 and there will be further developments in 2024. Although ChatGPT proved to be a phenomenal success, and was one of the catalysts behind the rally in US stocks, its ability to generate plausible-sounding feedback that is often untrue means that corporates remain wary of its full-scale adoption. New iterations of LLMs are likely to be released in 2024 which will offer significant improvements in information veracity and verifiability. This in turn may encourage more widespread adoption. Reports that OpenAI is working on a powerful new tool known as Q* may take AI to another level. Nobody knows for sure what Q* is, or how it works, but these posts (here and here) suggest that it could herald a revolutionary breakthrough in the way AI handles mathematical problems. This will open up a whole new range of applications and intensify the debate about how much control we are prepared to cede to the machines.
While on the subject of matters tech, one thing to look out for in 2024 is the prospect that Twitter (sorry, X) goes bust. As I pointed out in April 2022 “the financials of Musk’s Twitter deal do not look compelling.” They look a lot less compelling today, with Musk desperate to turn a profit on his ill-advised venture into social media. As usage numbers fall and advertisers desert the platform, it would come as no surprise if Musk were to seek a buyer at a knock-down price, especially as Tesla is no longer pulling up trees when it comes to its own finances.
But as I have been telling investors for years, it’s the unknown unknowns that get you. The whole narrative could be thrown off course by a random event (Covid or Russian invasion, anyone?) so it pays to take year-ahead predictions with a big pinch of salt. As long as they are not blown off-course before end-January, I will be happy. And on that note, I will end by wishing you all a happy and prosperous new year.
