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Market Insights December 2023

December 4, 2023
Harvest News
market insights

Current Topics in Markets

Optimism crept back into financial markets in November as investors increasingly bought into the idea that interest rates in the developed world had now peaked and that while the next interest rate move is certainly quite some time away it is more likely to be a downward change rather than a further rise. If this is the scenario which ultimately plays out then the big remaining question is have we managed the inflation spike without triggering a recession. The answer to that of course is that its too early to tell. With any rate rise there is always a significant lag effect before the full economic effect is felt and this will be particularly true of the current cycle as a result of a number of unique factors (i) the change in rates was more rapid than had ever been seen previously (ii) the world was emerging from a long period of low to zero interest rates (iii) the positive impact of covid financial supports for consumers and businesses was still being felt. In truth, it is likely to be the first or second quarter of 2024 before we are in a position to judge the recessionary impact.

However as things stand at the moment, the odds seem to point towards a recession in both Europe and the US, but not a very deep one. This being the case financial markets are likely to respond positively in 2024 and while progress will not be in a straight line (it never is), the likelihood is that investors in risk assets will be in a better place at the end of 2024 than they were at the start.

Equity Markets

November was a good month for equities and virtually all markets moved forward over the month. Once again, China was the exception as concerns about the economy won out over the perceived value opportunity in that market. 2024 will be the first full year of current interest rates. That, combined with weakening economies, will mean increased pressures on many corporates. Earnings disappointments are likely to be more widespread, particularly for those companies with high indebtedness and for companies exposed to consumer discretionary spending. So while we are becoming increasingly positive on the outlook for equities for the coming year, it will be important to be selective.

Equity Market Performances (percentage change in euro terms)

Bonds

Bond markets went into serious retreat in 2022 in response to the sharp rise in rates and really have experienced very little in terms of recovery since then. Financial markets are awash with bonds, both sovereign and corporate, trading at discounts of 20% or more to their par value and paying annual dividend yields of between 4% and 7%. Investors buying now can expect to be repaid at par when these bonds mature and in the meantime can enjoy the attractive levels of annual income. While we would avoid the riskier parts of the high yield bond market, we would encourage investors to increase their exposures to other bonds on a 2-3 year view.

Property

To a large degree, property is a creature of interest rates because of extent to which debt is used by property investors. Predictably, property funds have responded badly to the rise in rates, irrespective of whether they carry significant debt levels or not. Added to this, there are the  concerns about office usage in the future and of course about high street retail. However, the fall in property fund values has been indiscriminate and funds exposed to stronger areas of the market such as residential, healthcare and logistics are also down in value. Many are paying annual dividend yields of 7% and higher. While the recovery in property may take longer than other risk assets, there is no question that there is true medium term value on offer currently.

Alternatives

Despite a more positive outlook for risk assets generally, the equity market may well deliver plenty of volatility over the coming year. Because of this we continue to advise clients to include alternative asset classes (infrastructure, renewable energy, private equity etc) in their portfolios whether for reasons of low volatility or stable income.

Our Fund in Focus for December is The 2023 BVP EII Fund

As always, you should only consider the investment views contained in this Market Insights update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email justask@harvestfinancial.ie.

This marketing information has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and/or capacity for loss of any particular person. It should not be relied upon to make investment decisions.
Warning: The return may increase or decrease as a result of currency fluctuations.
Warning: The figures refer to the past. Past performance is not a reliable indicator of future results.
Warning: The value of your investment may go down as well as up. You may get back less than you invest.
Warning: The income you get from this investment may go down as well as up.