Market Overview & Outlook Quarter 4 2023 (1 October 2023 – 31 December 2023) and Investment Outlook 2024

Santa Rally 2023

Since a market low point at the end of October, equity markets, particularly in the US rallied strongly in the last two months of 2023. The US S&P500 surged 24% in 2023 and the technology focused NASDAQ jumped 43%. These gains were the largest since 2021 and 2020 respectively. The MSCI World Index which is a broad gauge of global equities recorded its best performance in 2023 since 2019.

This was most encouraging and welcome after a challenging 18 months as central banks around the world ratcheted up the cost of borrowing. Despite slowing economic growth, markets cheered as inflation is declining back towards target more quickly than anticipated. This has led to the expectation that interest rates will roll over in mid-2024 rather than remain at their current elevated levels until 2025.

Resilient Global Economy

Investors have been heartened that the US did not enter a recession in 2023 defying the consensus; the global economy has proved remarkably resilient against a backdrop of the most aggressive interest rate rising cycle in decades, geo-political tensions including war in Europe, supply chain chaos, cost of living issues and political volatility in many countries. In Q3 2023 the world’s GDP was more than 9% higher than pre-pandemic. Supply chains have been re-configured, Europe has managed to function independently of Russian energy and higher interest rates have not caused mass unemployment. This is a sold foundation for 2024.

Cautious Market Optimism for 2024

We are cautiously optimistic in respect of the market outlook for 2024 on the basis of inflation continuing to decline and the interest rate cycle reversing. Our optimism is tempered as this benign outcome requires a ‘soft landing’ for the global economy, ie. overcoming inflation without a recession. In the past, this has proven difficult to achieve and some scepticism is therefore required that this time will be different.

Government Debt and Interest Rates on Bonds

The US annual fiscal deficit was $1.7 trillion in September, the third-worst recorded in history. Potentially, more significant was that the interest bill reached $1 trillion, about 20% of the tax revenue. In 2007 when interest costs surpassed 20% of tax receipts, it contributed to a buckling of financial markets. China and France also face similar challenges in respect of debt. This high level of debt and the risk of stagflation may help explain why gold and some crypto currencies have rallied in recent months.

However, central banks and governments are alert to the risks and the need to balance inflation, economic growth and debt. This improving macro-economic backdrop should support both equities and bonds. It is likely that central banks will prioritise economic growth by cutting interest rates to keep the debt burden manageable.

Currently, 10-year yields on bonds remain higher than 2-year yields. This has historically been viewed as a signal for a potential recession since if the cost of borrowing is lower in future it encourages companies to postpone borrowing and investment in new plant and machinery, thereby slowing the economy. However, if interest rates are cut more quickly than currently anticipated, this could help to address this so-called ‘inverted yield curve’.

Broadening US Growth Opportunities

In 2023, the ‘Magnificent 7’ US stocks (the largest 7 listed US companies: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla) accounted for around two-thirds of the growth in the S&P500 with a collective valuation of nearly $12 trillion (about 2.5x the value of the entire UK stock market). This contrasts with the fact that over 70% of the S&P500 stocks underperformed the index in 2023. Investors have favoured the Magnificent 7 on the basis of their enormous size, competitive advantages and balance sheet strength expanding their forward earnings valuation multiples to 33x versus 20x for the rest of the S&P500. It should be noted that these 7 stocks valuations were supported by an impressive in their earnings by nearly 40% in 2023 whilst across the rest of the S&P500 in aggregate there was an earnings decline of around 2%.

The situation should change in 2024 as growth broadens across the market, particularly where companies can demonstrate resilient earnings growth in many cases boosted by artificial intelligence underpinned by large language models; it may become clearer next year how productivity may be improved in different industries with the adoption of AI. There is also a lot of innovation in diverse sectors, such as the enormous potential for weight-loss drugs, most notably Wegovy from Novo Nordisk,Toyota’s progress on solid-state batteries for the electric vehicle industry, as well as plenty of research into strategies for achieving Net Zero.

Indeed, there were promising signs in December that the market rally was benefitting a broader range of companies across the market. The US mid-cap Russell 2000 index soared over 10% in December, its best monthly performance since 2020.

European Markets Challenged but may Surprise

The UK market faces significant challenges including ongoing wage inflation, unresolved Brexit associated issues and political uncertainty with the general election anticipated in 2024 with a deadline of January 2025 if the Conservative government chooses a full term. However, the UK may potentially surprise to the upside with valuations now looking attractive and the prospect of new government initiatives after the anticipated general election in 2024. In the short-term, a modest uptick in unemployment is likely to be welcomed by investors since it could help limit wage inflation and help accelerate interest rate cuts benefiting the wider economy. A contraction in the economy in Q3 2023 and inflation below 4% in November was a positive sign that the inflationary heat is dissipating from the UK economy which is most welcome.

The German economy, the largest in the EU, has struggled in 2023 with an expected contraction of 0.4%, a situation exacerbated by a recent constitutional court ruling which blocked the government’s plans to reallocate unused pandemic funds to green initiatives and industry support. In addition, many economists have called for reform of the German debt brake which limits new borrowing. The OECD is more optimistic though in respect of the outlook for Germany since falling inflation (forecast to reduce to 2.7% in 2024) and rising wages will support real incomes and private consumption. The OECD forecasts economic growth for Germany of 1.3% and 1.5% in 2024 and 2025 respectively.

Energy Transition

There is a continuing focus on energy transition to Net Zero and this is also likely to benefit innovative companies, as well as infrastructure businesses, where a more benign interest rate outlook should provide a tailwind. Competition for green resources, such as lithium, copper and nickel, as well as sunlight and water is re-shaping geo-politics as regions which dominate their supply become more important. There is however an increasing risk of a ‘greenlash’ among voters who view ‘green’ policies as a conspiracy by the elite against ordinary citizens.

The oil price has been generally trending lower in 2023 with more supply and a slowing global economy, although as would be expected, it rallied with the start of the tensions in Gaza in October; the oil price has dipped again in recent weeks though as an escalation of the situation in the Middle East appears to have been avoided. The copper price is often viewed as a barometer for economic growth – it is currently trading in a narrow range, so suggesting a relatively stable but modest growth outlook.

China and Japan Present Opportunities

The Chinese economy has faced a confidence crisis since the pandemic; its COVID reopening recovery in 2023 was disappointing despite travel in the country having returned to normal. In addition, the scars of the pandemic have run deep, problems in the domestic property market have cast a long shadow and geo-political tensions with the West have not helped. Whilst President Xi Jinping’s recent visit to the US helped improve relations with the US, China is maintaining its pressure on Taiwan, especially with elections scheduled for early 2024 in Taiwan.

However, there are reasons now to hope that better time lie ahead for the Chinese economy. The government pumped $140 billion into infrastructure projects in October, as part of a package of stimulus measures to stabilise the economy. The state may yet need to do more to ensure property developers can deliver on projects, as well as help restructure debt for distressed property companies. This will require careful management against a backdrop of an ageing population in China and a slowing pace of urbanisation. The property market gloom is likely to weigh on consumers’ willingness to spend.

However, manufacturing in China looks much more positive, especially with the push towards de-carbonisation and technological independence from the West. This should also help exports recover in 2024. GDP growth in 2024 could be 4.5% – 5% if policy measures are successful in restoring confidence and helping ensure China does not face a similar debt-deflation spiral to Japan 30 years ago.


Since the miracle growth of the 1970s and 1980s came to an abrupt end, Japanese consumers have hoarded their savings in cash deposits in preference to equities. This worked well during a long period of deflation especially when backed by a government guarantee, but is less attractive now Japan has inflation of 3% and savings interest rates are only just in positive territory. The Japanese government is keen to encourage more investment in equities, so in January 2024 is introducing a Nippon Investment Savings Account (NISA), which is modelled on the UK ISA as a tax-free wrapper for equity investments. Japanese brokers have estimated that even a 2% re-allocation by Japanese consumers into NISAs would result in a market-moving $150 billion inflow into equities.

This could potentially give the Japanese market a significant boost and help draw in more international investors following Warren Buffett’s Japanese equity investments in his Berkshire Hathaway fund from mid-2020 onwards. The Japanese market as measured by the Nikkei-225 index has yet to re-gain its all-time high of 1989, but this could potentially be achieved in 2024.

Some emerging economies have interesting and exciting prospects, including India, Mexico and Vietnam on the basis of new trading relationships. Closer to the UK, Greece’s government debt has been upgraded to investment grade status after more than decade as ‘sub-investment’ grade.


The US presidential election in November is potentially the most significant event of the year since its consequences are global, impacting the full range of issues in the world from military support for Ukraine and Israel, the geo-political global framework, as well as climate change. At least, ideological differences should be set aside for the Paris Olympics for the global audience to enjoy in the summer.

Whilst the large number of elections around the world next year (more than 70 elections in 2024 covering 4.2 billion people and more than half the global population), as well as unresolved conflicts in Ukraine and the Middle East will inevitably result in ongoing geo-political pressures, such volatility and uncertainty, however, unwelcome, can create opportunities for investors.

Forecasts for 2023 were too gloomy and the global economy was more resilient than anticipated. The downward trend of inflation and the expectation that interest rates will reduce significantly in 2024 from 5.25% to around 4.5% should support both equities and bonds and ensure patient investors are rewarded, particularly with the diverse and exciting innovations from solutions to climate change, healthcare and artificial intelligence.

Please note, our Market Overview & Outlook is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500,

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