Another big election – small but big in terms of the outcome – will be the Taiwanese elections on 13 January 2024.
The decision of 14mn voters will have a significant impact on the trajectory of Taiwanese relations with China for years to come.
If it once again goes in favour of the Democratic Progressive Party then there will likely be a worsening of relations, geopolitical tension and investment terms, a flight to gold, US Treasuries and the dollar.
The great repricing – bond markets back to normal
Returns from fixed income markets were very varied in 2023. Some have done marvellously, others stuttering and barely clambering into positive territory.
The best thing to have done was to focus on areas less sensitive to interest rates and focus on areas of corporate and consumer credit.
For 2024, inflationary pressures seem to be receding – and inflation affects fixed interest markets in the way kryptonite affects Superman.
So maybe it’s not unfair to assume that as inflation wreaked havoc on bond markets in 2022, disinflationary tendencies could reap rewards for investors in the coming months.
What central banks do in response remains to be seen but (and it’s a big but) if they do cut interest rates, then it could act as a spur to fixed interest markets, including government bonds which have lagged materially this year.
Of course – there are two big things that could derail this theory – the upcoming elections and economic growth, or the lack of it.
The biggest risks to fixed interest surround refinancing requirements of governments and companies – the ‘maturity wall’.
Equity markets in 2024
Equity markets broadly appear to be fair value, but valuations and sentiment are mixed. The US market remains relatively expensive and earnings optimism for 2024 is hard to believe.
Profit margins have narrowed from record-wide levels but have stabilised – they could improve in 2024. We do think that quality equities will perform well and should outperform in a downturn or a recession.
We think that interest rate sensitive companies could recover in 2024 and we remain positive on healthcare, infrastructure and renewables.
It’s a truism to say the year ahead is always an unknown quantity.
But the shock factors of the last few years (the pandemic, the war in Ukraine, rising tension in the Middle East) are testament to the fact that you rarely know what’s around the corner.
Although we all have a go at crystal-ball gazing, none of us can predict the future. But given the current environment, taking large risks would be inappropriate and being selective is important.
Having a well-diversified portfolio and one that’s well-structured for inflation, higher interest rates and any other shocks that might be around the corner is always the best approach.
