2023 has been anything but ordinary. Who thought we would say that after the events of the pandemic which started more than three years ago?
We started with rumblings of a banking crisis with SVB and Credit Suisse collapsing at the start of the year, the first banks to collapse since Lehman Brothers in 2008. Conflicts and geopolitical tensions continue in Ukraine and have erupted most recently in Gaza. China, a major trading partner of many countries has a sluggish economy in its post-pandemic recovery.
If that wasn’t enough, many Central Banks around the globe have continued their efforts to achieve a “soft landing” in the fight against inflation. For the everyday person, that has meant cost-of-living pressures whilst inflation returns to central banks’ target levels.
Concerns of a global recession like that experienced in 2008 appear to have eased. Whilst still above central banks’ target levels, inflation around the world looks likely to have been tamed to an extent.
Throw into the mix other significant events, such as what could be a hard-fought presidential election in the United States, and investors will have a lot occupying their minds in 2024.
So, what are the main themes which could play out next year?
The fight against inflation and rate cuts
Over the past 18 months, many Central Banks have pulled the economic handbrake by raising interest rates in a bid to slow consumer spending and rebalance supply and demand as the world lifted from the pandemic.
However Central Banks need to balance economic tightening with loosening so as not to tip their country into a recession. There is growing talk of interest rates being cut next year – so loosening that economic handbrake - with many different predictions as to when that might happen and who might cut first.
With the biggest economy in the world, most eyes are on the United States. The Federal Reserve chairman, Jay Powell, announced at the bank’s November meeting that the US would keep interest rates on hold. His speech however kept the door open for future rate hikes. However, many are – like J. P. Morgan - predicting the Federal Reserve is unlikely to raise interest rates further.
US quarterly GDP figures were surprisingly strong with retail sales resilient. However, the Fed's rate hikes will likely have a lagging impact on the economy. The latest figures on the US labour markets showed signs of job vacancies slowing down. The latest CPI came to be weaker than expected. However the Fed is unlikely to cut the interest rates until mid-2024 since inflation is still above its target level of 2 per cent.
Geopolitics will continue to play a role in investment markets throughout 2024 with commodities like oil and gas likely increasing in price.
Oil and gas prices could continue to fluctuate from the ongoing conflicts in Ukraine and the Middle East as there is always risk around disruptions. If the war in Gaza develops into a wider conflict in the Middle East, for example, with Iran and Saudi Arabia becoming involved, it could cause another spike in oil prices.
Geopolitical turmoil causes more kneejerk reactions in price whereas economic recovery of large consuming nations, like China, play a longer game.
China's economic recovery and consumer spending behaviour in the coming months could be crucial in shaping the commodity market trajectory.
The Chinese economy has been sluggish over recent months. Property construction concerns remain a major issue as the largest indebted developer, Evergrande, defaulted on its coupon payment, risking wider creditors’ wealth. Other countries around the world looked for production outside of China due to COVID-related disruptions to supply chains. Despite stimulus from the Chinese government, it is still too early to say how China will recover.
If China recovers well, it could be a good year for the big resource companies, especially Australia’s iron ore producers. China is the biggest consumer of iron ore and the largest producer of steel globally. Steel demand is being driven by increases in the production of EVs and other infrastructure to make up for the shortfall of a slumping residential housing sector.
Is Big Tech running out of steam?
Big Tech has mostly driven the S&P 500's positive performance in 2023. Dubbed the ‘Big Seven’ - Apple Alphabet, Meta, Microsoft, NVIDIA, Amazon, and Tesla – collectively kept the S&P 500 in positive territory in 2023.
Big tech’s growth has largely been the result of the advancement and interest in artificial intelligence (AI). AI isn’t new technology but with the release of ChatGPT, the accessibility of AI has propelled it into the mainstream and become a household name.
NVIDIA is a company which has effectively appeared from nowhere unless you are really into components of tech. It has a near-monopoly on the kind of graphics processing units (GPUs) used for AI – an estimated 80 per cent market share – and rapidly “got hot” this year.
The company has had a whopping year-on-year revenue growth of 206% in the third quarter of fiscal year 2023, following a 102% jump in the last quarter.
Markets like ‘hot’ tech stocks, and NVIDIA was as hot as they come, given that it is one of the most advanced chipmakers that can meet demand coming out of generative AI technology.
Can the tech boom continue though?
Whilst Big Tech stocks could maintain the momentum for the rest of 2023, the pace is expected to slow down next year as an economic slowdown from rate hikes and reduced consumer spending start to take effect on the broader economy. The biggest indicators of this, again, is the data on factors such as CPI, GDP, wage growth and jobs over the coming months.
The US Election in November 2024
Markets often react to what happens in the US given the interconnected web of our markets and economies. This can happen abruptly or over a longer period. It comes down to what decisions are made and how this is communicated by chosen Governments.
The US election later next year could impact the US economy depending on who gets elected and what their chosen fiscal policy will be. The different parties have different objectives and directions on how to spend taxpayers' money. The Republican party is still to decide its candidate, will Trump be the preferred candidate? The only certainty we have is that 12 months is a long time in politics.
With sticky inflation, high-interest rates and geopolitical disruption still playing out, 2024 presents both opportunities and risks. Whilst a global recession may not be on the cards, a global economic slowdown could be. For the next few months at least, there remains a tight line of rhetoric and decision-making by Central Banks.