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In 2024, voters will go to the polls in a record 77 countries. We explore how they will impact economies and stock markets. We also consider how supply chains and shipping routes are affected following Houthi attacks on shipping in the Red Sea.

Equities are set to outperform bonds, boosted by company sales growth and elevated profits. Bonds, meanwhile, should benefit from interest rate cuts, which could lead to higher bond prices. The Artificial Intelligence (AI) boom is expected to continue in 2024, but the US stock market should broaden out beyond this sector into unloved areas like energy and small caps.

Despite global economic uncertainty, investors took comfort from an impressive set of company earnings in the third quarter of 2023. Gold has hit a high this month driven by an outbreak of optimism that US interest rates have now peaked. Equities rallied partly thanks to the Artificial Intelligence (AI) boom, but appetite for these stocks may not last.

In November’s episode of the Evelyn Partners Investment Podcast, Cherry Reynard and Daniel Casali look at the financial market implications of the conflict and the humanitarian crisis unfolding in the Middle East. The tragic loss of innocent, civilian lives in the region is shocking and our thoughts are first and foremost with all those affected. While the impact on the financial markets has been limited, it may have longer term implications for the oil price and the green energy transition.

Until recently, inflation appeared to be in retreat. Central banks felt sufficiently confident to pause on interest rate hikes. However, a blip in the inflation figures has worried investors, who fear more US rate rises could emerge as a result. The main culprit has been oil prices, which have moved higher in response to supply cuts from OPEC, Expectations are still for a ‘soft landing’ in the US, with any recession likely to be short-lived and shallow. The UK and Eurozone face greater economic headwinds, In the UK, employment data has seen a notable deterioration in recent months. Nevertheless, while recession is more likely, it is not expected to be deep or persistent. Emerging markets have been pulled lower by the weakness of China this year. There is no imminent revival in sight for China, but other emerging markets have been doing well. Latin American countries have been cutting rates, while India has seen significant growth. There are plenty of idiosyncratic opportunities to exploit.

The services sector continues to drive growth in the global economy, despite rising interest rates. Spending on services is being driven by savings built up during the Covid era, and pent-up demand for areas such as travel and leisure activities. Along with resilient labour markets, this has continued to push up consumption. In the near-term, there is no sign of this stopping. Unemployment is still low and consumers still have money to spend. Phenomenon such as Swiftonomics – the blockbusting billion dollar tour by Taylor Swift – have shown the consumer’s ongoing propensity to spend.   Manufacturing, however, remains on its knees, with little hope of a revival in the short-term. Nevertheless, CEOs may be encouraged by the recent equity market rally to revive investment in production, allowing the sector to recover.

The S&P 500 has just capped its longest winning streak in over a century, encouraged by better data on inflation, economic growth and corporate earnings. However, data remains volatile and it is possible that markets have moved too far too fast. Valuations now leave little margin for error. July saw the Federal Reserve and European Central Bank raise rates once again, though many economists expect this to be the peak. However, central banks are keeping their options open and have made it clear they will respond to new data as it emerges. There are also strains in the fixed income market, with credit spreads tightening as economic data improves. While there are still opportunities in both equity and fixed income markets, it argues for a selective and balanced approach to asset selection.

With the S&P 500 up 20% since October 2022, another bull market has begun. To date, it has been led by a narrow group of technology companies, but there are signs it may broaden out in the months to come. This may create momentum for global stock markets in the second half of the year, even as a recession looms. Consensus expectations are now for a less severe recession than was expected a year ago. Falling expectations of peak US interest rates have also helped stocks to rally too. The weaker dollar may also be a swing factor for investors. Dollar depreciation is usually indicative of an improving global growth backdrop; it tends to depreciate at times of greater certainty on the economic outlook. These factors may combine to create a better outlook for stock markets in the remainder of the year.    

2023 has seen a surprising revival in the technology sector. This defied the grim predictions of some investors who saw rising interest rates marking an end to the decade-long dominance of technology stocks. The sector’s strength has partly been driven by the excitement around artificial intelligence and its potential for disruption. Artificial intelligence could be a major force over the next decade. Its influence is likely to be felt in more industries, and investors need to align themselves with the disruptors rather than the disrupted. Ultimately, new and as-yet-unseen opportunities will emerge as AI grows in power and capability.    In the shorter-term, the resolution of the debt ceiling has allowed markets to breathe a sigh of relief. In the end, the impact for bond and equity markets was minimal. All eyes will now turn to the next move from the Federal Reserve and the timing of its next rate rise.

The gold price has been rising, reaching a record high at over $2,000 per ounce in April. This suggests markets see an imminent end to the rate rising cycle in the US and further falls in the Dollar. Buying from foreign central banks is also driving the gold price higher, as countries seek to diversify their asset bases away from Western government bonds. Markets believe inflationary pressures are ebbing. In the US, March’s CPI data showed the level of inflation at a two year low, while lead indicators such as falling job openings and lower selling prices show core inflation starting to come down. The exception is the UK, where inflation remains stubbornly high. The Dollar has been weakening in response to an expectation of slower rate rises from the Federal Reserve. This may continue as other countries, such as the Eurozone, continue to raise rates, Foreign exchange traders may also pay attention to the growing deficit in the US, which increasingly requires foreign capital to support it.

Financial markets have been dominated by the fallout from the banking sector turmoil in March. The problems at Silicon Valley Bank and Credit Suisse were more a consequence of poor management than a broader fragility in the global banking system, but it has still unsettled bond and equity investors. It has also prompted a reappraisal of interest rate expectations. Bond markets now expect the Federal Reserve to cut sooner. They believe banks are likely to rein in lending, which will slow economic growth and give central banks greater flexibility on future rate rises. The impact for stock markets is not yet clear. They remain trapped in a holding pattern, waiting for greater clarity on interest rates. It is possible to build a gloomy or optimistic scenario. While inflation still looks sticky and some economic weakness appears inevitable, China’s reopening is fuelling growth and a degree of bad news is already priced into markets.  

There has been encouraging data on the health of the global economy in recent weeks, with employment, inflation and consumer spending all giving cause for optimism. There is increasing confidence that a hard landing may be avoided, in spite of higher interest rates. However, financial markets have wobbled in recent weeks. In particular, investors continue to worry about further rate rises from the Federal Reserve, even though inflationary pressures appear to be easing. The US central bank has reiterated its commitment to price stability above economic growth. Closer to home, the UK has agreed a new Brexit deal, potentially solving the thorny issue of the Northern Ireland protocol. This should be a boost for UK businesses, at a time when the domestic stock market looks cheap relative to its peers and its dividend yield is high. This may boost investor confidence in the UK market.