Investors are eyeing 2024 with “cautious optimism”, according to a market analyst, as inflation concerns recede and innovations in AI begin to bear serious fruit.
Craig Erlam, Senior Market Analyst at OANDA, expects discussion of inflation and interest rates to continue to dominate the global economy this year, despite a huge improvement in the overall situation.
“We’re in a much better place now. We’re in a place with more certainty, although not absolute clarity. But the fact inflation is on the way down rather than the way up is hugely important.”
Craig notes that destabilising factors will persist, with the backdrop of the war in Ukraine, the situation in Israel and Gaza, and tensions between China and Taiwan.
However, inflation in major economies is not far from reaching the central bank target of 2%, with interest rates expected to fall fairly rapidly afterwards. While there won’t be a return to the zero interest rate policy of the 2010s, Craig expects that rates will at least move to a level that is less punitive for the economy.
The fact that 2024 is going to be a major year for elections in the UK and US may affect the timing of this. The fact both elections are falling towards the end of the year may necessitate starting the cutting cycle earlier, as Craig notes that central banks will want to avoid being seen as interfering with the election at all.
Some positive developments may follow. Following the base rate, Craig expects mortgage and lending rates to come down “quite quickly”.
“We’re seeing almost daily reports now of various different banks reducing their two-year, five-year fixes. That’s just competition – if lenders don’t come down with base rate then someone will and therefore the rest will have to ultimately follow.”
Craig also expects 2024 to be a positive year for equity markets. One may be that the discussion of AI will move beyond hype to real world impacts. Right now, he says, we are in a similar stage to the early days of the iPhone, when people were wowed by its novel features but gave little thought to how the device might actually be used.
“It’s not necessarily the Terminator outlook or that we’re all going to be unemployed, but more a case of how this is going to improve our lives.
“What companies are going to make the most of it? What companies are going to make efficiencies? What’s that going to do for productivity?”
Crucially companies outside of the Magnificent Seven stocks, companies seen as well positioned to gain from AI, may reap some of the benefits as they start to productively deploy AI.
He argues that the first quarter may be relatively slow, due to the huge gains in the latter half of the year in the US and Europe (although the FTSE remained relatively stagnant).
These were driven by the Magnificent Seven, as well as by the growing expectations that interest rates would fall. Notably, markets “overreacted” to the Federal Reserve Chair Jerome Powell indicating a pivot.
“So I wouldn’t be surprised if in the first quarter we either see it do little or we see a little bit of heat come out of the market.”
Craig would summarise the mood now as “cautious optimism”.
For the year as a whole, Craig says there’s “every chance we see another very good performance.”
“Maybe I’m overly optimistic – maybe I’ve still got a bit of festive fever – but I do think this is hopefully going to be a year when the 2020s become a little more promising, because the first four years have been pretty bleak.”