The last few years have been unpredictable for investors. A combination of UK political factors and global events has upset financial markets causing periods of short-term volatility.
As a cost of living crisis and soaring fuel prices caused worry for millions, central banks raised the rate of borrowing in an attempt to quicken the drop of slow-to-fall inflation.
Periods of economic unease serve to highlight the need for diversified investment portfolios and a focus on your long-term goals.
Keep reading for an update on the markets during Q3 2023 and a look ahead to what the UK economy might look like in 2024.
2023 has been a year of market volatility and rising interest rates
Generally this year, UK inflation has been falling from its 41-year peak of 11.1% back in October 2022.
Source: Office for National Statistics (ONS)
While July brought a larger-than-anticipated fall, inflation has since flattened out. While that month also saw largely positive market sentiment and strong overall returns, flattening inflation helped fuel increased market volatility during August.
PortfolioMetrix confirms that Q3 2023 was a mixed bag for equities, while bonds continued to struggle as the likelihood of bank rate drops diminished, increasing yields. The prospect of higher-for-longer central bank rates has been reflected in global markets, despite generally falling inflation worldwide.
Low-risk bonds might have struggled this quarter but diversified portfolios benefited from a rise in oil prices. Elsewhere, other global events highlighted the importance of geographic diversification in investment portfolios.
Agricultural commodities rose due to Russia’s cancellation of a Black Sea grain export deal, continuing Chinese economic weakness caused some market volatility, and natural gas prices rose in response to possible strikes at Australian liquified natural gas plants.
Back at home, the Bank of England (BoE) last met on 2 November, when its Monetary Policy Committee (MPC) voted to keep the base rate at 5.25%.
Source: BoE
Minutes from that meeting confirm that the anticipated date at which the Consumer Prices Index (CPI) will reach the Bank’s own 2% target has been pushed back again. It had stood at Q2 2025 but has now been pushed back to the end of that year.
But what does all of this tell us about the economy and your investments in 2024?
While predicting inflation and interest rates might be possible, forecasting the likelihood of a recession is harder
With inflation broadly falling and the BoE base rate arguably at its peak, all indicators suggest the economy is heading in the right direction as we approach the new year.
Inflation will remain high in 2024 (especially following the new prediction from the MPC). Interest rates, meanwhile, might have peaked but their effects on markets and the economy will be longer-lasting.
PortfolioMetrix confirms that it takes time for interest rate rises to work their way through the economy. This is down to several factors; from the time it takes lower-rate company loans to mature to when relatively cheaper mortgages expire.
Those looking to predict the possibility of a recession in 2024 are looking to recent recalculations (reported by the Guardian) of the UK’s post-Covid economic recovery. These positive reports have been responsible, in part, for the downplaying of the chances of a recession in some quarters.
General market sentiment is more optimistic, certainly, meaning investors judge a recession to be increasingly less likely.
Whether or not they are right remains to be seen.
Diversification in your portfolio is key to spreading risk whatever 2024 brings
Diversification in your investment portfolio remains key.
While bonds have had a difficult time of it of late, they are now offering very attractive yields, as well as insurance against a possible recession. If a recession is avoided, higher-risk equities could see good returns.
Within these asset classes – and the asset allocation that best aligns with your risk profile – you should also diversify according to industry and region.
Short-term volatility is to be expected and accepted, but we also understand that focusing on your long-term goals can be harder during tougher economic times. That’s why we’re always on hand to offer reassurance and to ensure your investment remains aligned with your goals and attitude to risk.
Get in touch
If you have any questions about your investments or how the future of the UK economy could affect your long-term goals, speak to us now. Please contact us on info@janesmithfinancial.com or call 01234 713131.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
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