Stock Take

Today marks 15 years since the so-called ‘Miracle on the Hudson’, where pilot Chesley ‘Sully’ Sullenberger successfully emergency landed US Airways Flight 1549 in the Hudson River. A decade and a half later, and investors are hoping for another soft landing – though this time they’re looking to Central Banks to chart the course.

On these lines, some were expecting, or hoping, for US interest rates to begin falling as early as March. Yet December’s US inflation numbers, released last week, showed the situation remains complicated. On the one hand, headline inflation increased from 3.1% in November to 3.4% in December, but at the same time, core inflation – which strips out the volatile food and fuel sectors – fell slightly from 4.0% to 3.9%.

Felipe Villarroel, Partner at TwentyFour Asset Management, noted that the numbers didn’t show any disastrous trend to suggest inflation won’t eventually fall back to the desired 2% rate. However, he added: “From a macro point of view, it is not surprising to see monthly inflation numbers being volatile. The downward path in inflation is likely to continue to be bumpy and the ‘last mile’ might prove more stubborn than declines seen in previous quarters.”

As a result, he predicted a cut to interest rates in the US is unlikely to come in March. The Federal Open Market Committee, which decides US interest rates, next meets at the end of January. Market players will likely be watching closely for any hint as to the direction they are planning on taking over 2024.

Geopolitical issues continue to complicate matters. Tensions between the West and the Houthis in Yemen continue to rise. The conflict involves the Red Sea, where Houthis have been firing on international shipping, with the US and UK responding with missile strikes of their own. The importance of the Red Sea to international shipping lanes means the rising uncertainty is already having an impact on fuel prices.

Despite these worries, US equities rose. In particular, the familiar technology companies had a good week. Of note, last week saw Microsoft overtake Apple to become the world’s most valuable company. Both companies ended the week valued north of $2.88trn; however, Microsoft pipped its long-time rival after a 1% increase over Friday.

The situation remains more complicated in the Eurozone. There, governments and Central Banks have been fighting a dual battle against inflation and a number of slow-moving economies. After a blip two weeks ago, European markets returned to admittedly weak growth last week. It was revealed unemployment in the Eurozone was just 6.4% in December, its lowest rate since the creation of the single currency.

Explaining what this means for the currency block, BlueBay’s Chief Investment Officer Mark Dowding noted: “A tight labour market highlights ongoing risks to wage inflation and, in this context, [European Central Bank (ECB) Board member] Isabel Schnabel made comments suggesting that the ECB only sees a modest decline in wages as likely in 2024.

“These comments were taken in a relatively hawkish light in comparison to her comments prior to Christmas, which had been quick to emphasise the progress in bringing inflation down during the fourth quarter last year. Consequently, enthusiasm for a rate cut in March has cooled.”

To somewhat emphasise the conflicting worries, this morning German figures revealed the continent’s largest economy shrunk by 0.3% in the final Quarter of 2023 and contracted by the same amount over the course of the whole year.

The generally mixed performance of equities last week was also present in the UK, where the FTSE 100 fell. Meanwhile, Chinese equities also retreated. There, the property market issues continue to hamper values. At the same time, caution ahead of Taiwan’s General Election and retaliatory sanctions by Beijing on several US defence companies likely weighed on sentiment.

Wealth Check

The dip in headline inflation in late 2023 was encouraging. However, many small and medium-sized enterprises (SMEs) still face big challenges, with continuing high price rises and customers cutting discretionary spending.

Firms are still adjusting to higher interest rates, which many economists expect to become a ‘new normal’ level. The impact of rising energy costs, supply chain issues, and geopolitical instability are also still playing out. So business uncertainty looks set to continue well into 2024. These trading conditions could impact your margins for the year ahead if you don’t address them now in a formal, dynamic long-term plan.

It’s possible to make short-term changes to address some of the challenges facing your business, such as higher interest rates and wages. But if these actions are not part of a formal, documented long-term plan, they will likely be piecemeal and could lead to unintended consequences.

For example, cutting essential marketing spend or passing on price hikes in your supply chain without careful planning could dramatically dent demand for your products, leaving you weaker as the downturn eases. As economic factors change, businesses should update their sales and cash-flow forecasts regularly and factor these into their long-term plan.

Economic downturns bring the threat of non- or late payments from clients, which can hit your profits. Downturns can throw up opportunities too, and some SMEs are adjusting their plans to accelerate out of the downturn. Some well-run companies have shifted from organic growth to acquisition models (growth by buying other companies) to take advantage of cheaper company valuations.

Others are exploiting gaps in the market as they appear by expanding into new geographies, services, or client segments. Others will use the softer labour market to acquire talent. People cannot understand unwritten plans telekinetically. Noodling ideas in your head is not enough to keep your business intact and moving forwards. You need to bring others with you, including clients, internal teams, investors, and suppliers.

Articulate and write down your plan and how you will deliver it, then review it regularly. This is the time to act with intent. Get your plans in place so you’re set to face 2024 with confidence.

In The Picture

With a relatively high risk of inflation across a number of markets, we believe having a diverse portfolio remains an important strategy for investing.

Past performance is not indicative of future performance.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The Last Word

“We very much hope they will take a lesson from this and stop harassing shipping.”

UK Defence Secretary Grant Shapps explains the UK’s decision to bomb Houthi sites in Yemen.

BlueBay and TwentyFour as fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 15/01/2024

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