Clearer skies

Thursday 21st December 2023

As we come to end of the year the good news is that markets appear to be having the infamous "Santa Rally" bounce from the lows at the end of October.

As an example, abrdn Wrap shows net returns for the Brewin Balanced and LGT Sustainable Balanced Model Portfolios (i.e. medium risk portfolios) being in excess of around 7% and higher risk portfolios in excess of around 12% to the 19th December, since 27th October. The year though, hasn't been as good as optimists like us thought it would be, but then nor has it been as bad as the pessimists would have had us believe, avoiding the hard recession feared by many, with the ups and downs, ebbs and flows being pretty normal. It just feels that it has been more volatile than previous times due to the microscopic and constant news and analysis, or maybe that's just us constantly looking at what's happening.

Why has this happened?

Inflation is heading in the right direction with figures in the US and Europe having come down and this week the UK rate at 3.9% against an expected 4.3%, so good news in the fight against inflation.

Central Banks from around the world have also provided their latest deliberations on interest rates. The Federal Reserve in the US, the Bank of England, and the European Central Bank all continued to keep rates on hold, pretty much as expected. The most notable aspect was the Federal Reserve when it released its latest 'Summary of Economic Projections', including they felt an average of about 0.75% of rate cuts by the end of 2024. This gave immediate encouragement to markets looking for any signs of confirmation that a 'pivot' from rate hikes to rate cuts is on the cards. Fed chairman Powell's speech on 25th August concluding comment of "navigating by the stars under cloudy skies" seems now to indicate much clearer skies with a move from being "hawkish to dovish". Comments are looked at as either "hawkish" which means they are in support of the raising of interest rates to fight inflation, even to the detriment of economic growth and employment, or "dovish" which means when they favour economic growth and employment over-tightening interest rates.

By contrast, both the Bank of England and the ECB adopted a much more hawkish tone. In line with the previous meeting, six Bank of England Money Policy Committee members backed keeping rates on hold, whilst three members even supported a further hike. The accompanying statement continued to suggest policy would need to be sufficiently restrictive for sufficiently longer to bring inflation back to target. Will today's inflation news change that hawkish stance? The ECB noted price pressures remain elevated, and importantly, ECB President Lagarde, said rate cuts were not discussed. A question for 2024 is if there will be a split in the West and the concerted combined approach has come to an end.

More cautious portfolios have also performed well with a net return more than 6% for the same period. This reflects lower risk portfolios having more invested in both Government and Company Bonds. We commented previously that the benchmark 10-year US Bond yields (interest), (which rises as their value and price falls and vice versa), briefly broke through the 5% barrier. Bond yields reacted very positively to the Central Banks stance with the 10-year US Bond yield having fallen by over 1% and dragging down the UK 10 Year Gilt by the same amount. Good news for the 1.6 million people in the UK next year whose mortgage rates are due for review.

2024 Outlook

There is lots to think about for next year - interest rates and inflation, and how issues such as rising company defaults, conflict and geopolitics are perceived, with elections taking place, particularly in the US and UK. The first half of the year will still focus mainly on inflation and interest rates and if inflation has finally been brought under control. It will be if the "soft landing" of economic slowdown can be achieved without a full recession. Interestingly, at Fund Manager reviews last week there was quite a contrast of interest rate reduction expectations from very little, if any, to a full 1.25%. It will then be about how Companies are performing, especially in the more normal interest rate environment. This will be the big achievement in restoring more normal interest rates, after the Financial Crisis and then Covid, without having put us into a full-blown recession. Setting interest rates that make companies and consumers carefully consider investment choices, borrowing and spending decisions and to understand the consequences of such decisions, is important.

Such challenging times bring opportunities. One fund manager told us there had never been so many good Companies to invest in and of course the pace of change grows ever more quickly. Opportunities lie in:

• Infrastructure investment in tackling climate change. Just look at the US Inflation Reduction Act which aims to spur investment in green technology in the United States by devoting $369 billion (a huge sum) in subsidies through grants, loans and tax credits to public and private entities. It has already resulted in $300 billion in new battery, solar and hydrogen electrolyser plants.
• Technology with the likes of AI advances resulting in significant increase in productivity to offset concerns about recession and slow growth.
• Healthcare advances with new drugs and treatments that could save healthcare systems significant amounts of money. Two powerful new drugs, Donanemab and Lecanemab, heralded a turning point in the fight against Alzheimer's, whilst Ozempic and Wegovy proved that not only could they induce significant weight loss in the fight against obesity, but drastically reduce symptoms of heart failure and the risk of heart attacks and strokes.

Could it be that the combination of these positives provide a prolonged period of growth, lower inflation and better health?

Autumn Statement

You will have all seen the details of the Autumn Statement and so we focus on something much predicted and missing to give a slightly different perspective. There was much talk of Inheritance Tax (IHT) being changed and one aspect of IHT is Business Property Relief, meaning freedom of IHT after owning a business asset for 2 years. Companies such as Octopus run schemes to take advantage of this via a Private Company that makes qualifying investments. Octopus has a Company called Fern Trading with investments of £2.8 billion. Many such investments are in renewable energy. Fern Trading is the UK's largest producer of solar energy from commercial-scale sites. It owns and operates more than 200 renewable energy sites, including solar installations, windfarms, biomass plants, landfill gas sites and reserve power plants. Imagine making a tax change that jeopardises such an investment in these energy conscious times!

There was obviously more to it and in particular pension changes with 100 pages in the new Finance Bill dedicated to pensions with the abolition of the Lifetime Allowance from 6th April 2024, and luckily some fears we had not materialising.

Bailey Cook 2023 Review

2023 has been a challenging year, due to market volatility, although it is pleasing for us to report on another successful year. The highlight has been Jamie Little achieving the accolade of Certified Financial Planner (no mean achievement in such a short space of time) and developing his advisory skills fitting in very comfortably to our style and culture in looking after clients.

Sarah completed her Sodbury Slog raising £954 so far for our chosen Charity Centrepoint and thank you to those of you who have kindly donated. We'll match this up to £1,000 raised and if you didn't get the chance to donate, but would like to please visit our JustGiving page. All contributions will be gratefully received, thank you.

We close on Friday for the festive break opening again at 8.00 a.m. on the 2nd January and we look forward to seeing you all in 2024. In the meantime, it's a Merry Christmas from Him and a Healthy, Happy and Prosperous New Year from me.