Economic and market background
On 18 December, following weeks of intense seismic activity, a volcano on the Reykjanes peninsula of southwest Iceland erupted. Large quantities of lava and smoke were ejected across a wide area, creating a spectacular, red- lit backdrop which could be seen from Iceland’s capital Reykjavik some 25 miles away. Financial markets, meanwhile, after coming under significant pressure during the second half of the summer and October, were reignited during the final few weeks of the year as hopes for an economic soft landing gathered pace, with a notable easing of financial conditions supported by a disinflationary narrative and increasingly dovish rhetoric from the US Federal Reserve (Fed).
Headline US consumer price inflation resumed its downward trend to 3.2% (year on year) in October and 3.1% in November.1 signalling to market participants that the Fed remained on track in its efforts to return inflation to its 2% target. In the eurozone, consumer price inflation fell for the third successive month in November to 2.4%,2 while the annual rate of increase in the UK’s consumer prices dropped to 3.9% in November from 4.6% in the previous month.
Total returns (%) to 31 December 2023
| Asset class | Index | 3 months | 12 months |
| UK equities | FTSE All-Share | +3.2 | +7.9 |
| North American equities | FTSE World North America (£) | +7.1 | +19.4 |
| European ex UK equities | FTSE World Europe ex UK (£) | +7.6 | +15.7 |
| Japanese equities | FTSE Japan (£) | +3.3 | +13.3 |
| Asia-Pacific ex Japan equities | FTSE World Asia Pacific ex Japan (£) | +8.5 | +8.3 |
| Emerging-market equities | FTSE All-World Emerging (£) | +2.1 | +2.9 |
| UK gilts | FTSE Actuaries UK Conventional Gilts All Stocks | +8.1 | +3.7 |
| Corporate bonds | ICE BofA Sterling Non-Gilt | +7.4 | +8.6 |
| Overseas government bonds | JP Morgan Global Government Bond (ex UK) (£) | +2.9 | -2.1 |
| Gold (US$) | Gold ($/ozt SIX) | +11.7 | +13.2 |
| Gold (£) | Gold (£/ozt SIX) | +7.0 | +7.6 |
Conclusion
As we enter 2024, the investment backdrop remains volatile and uncertain. Although headline inflation has declined significantly in recent months, price pressures are likely to remain as a result of structural factors that include changing trading patterns, labour shortages and higher government spending. Furthermore, while a recession has so far been avoided, the mounting effects of higher interest rates and financing costs are likely to weigh further on economic activity during the course of the year.
Investors must also continue to contend with heightened geopolitical risk, as exemplified by the conflicts in Ukraine and the Middle East, and political uncertainty, as elections approach in the US, the UK and other countries.
In this challenging environment, it will be important for investors to identify the long-term growth opportunities in areas supported by structural demand, such as artificial intelligence and the energy transition.
Given the likelihood of a growing dispersion of performance between different regions, asset classes and securities, we believe the case for an active investment approach is stronger than ever.
The world is full of foolish gamblers, and they will not do as well as the patient investors.
Charlie Munger, investor, 1924-2023
1 Rise in US core inflation highlights stubborn price pressures, Financial Times, 12 December 2023.
2 Euro zone inflation tumble pits ECB against markets, Reuters, 30 November 2023.
3 Fed policymakers parse inflation data for signals on rate path, Reuters, 29 November 2023.
4 US economy grows 5.2% in third quarter; higher interest rates eroding momentum, Reuters, 29 November 2023.
5 With rate hikes likely done, Fed turns to timing of cuts, Reuters, 13 December 2023.
6 December 12-13, 2023 FOMC meeting, federalreserve.gov.
7 Rise in US core inflation highlights stubborn price pressures, Financial Times, 12 December 2023.
8 Solid US job growth, drop in unemployment rate underscore labor market resilience, Reuters, 8 December 2023.
9 ECB resists rate cut bets with pledge to stay tight, Reuters, 14 December 2023.
10 Macroeconomic projections, December 2023, ecb.europa.eu.
11 UK recession might be under way after economy shrinks in Q3, Reuters, 22 December 2023.
12 Bank of England rebuffs rate cut talk after Fed ignites markets, Reuters, 14 December 2023.
13 Japan strives to control debt in face of rising rates, Reuters, 22 December 2023.
14 BOJ keeps ultra-loose policy, offers few hints on exit timing, Reuters, 19 December 2023.
15 IMF upgrades China’s 2023, 2024 GDP growth forecasts, Reuters, 7 November 2023.
16 China December factory contraction deepens, more stimulus on the cards, Reuters, 1 January 2024.
