3 Mins
How many days did January have? The long stretch of dark nights is finally on the turn, and it’s been fantastic to see the amazing sunrises and sunsets our country enjoys with the earlier rising and later setting.
When we issued our newsletter in December we wanted to help explain why investments hadn’t performed in a way that many were familiar with. We also wanted to reiterate our message about investment being a journey that’s personal to your own circumstances.
So with 2023 well underway, we’ve spoken to a couple of our investment partners, Parmenion and abrdn, and have summarised below how they believe markets will perform this year.
Key points:
- Inflation trend has been downward.
- UK food prices remain high and have impacted consumer confidence.
- US Federal Reserve and European and UK central banks raised rates in February.
- Central banks must balance reducing inflation while avoiding inflation surge.
- Cautious optimism in the market with FTSE 100 rising 3.7% since the start of the year and global stock markets following a similar trend.
- Diversified, managed investment funds are expected to provide strong long-term returns.
Market Update: Strong start, but a long road ahead
After a very difficult 2022, January brought a degree of renewed optimism in markets.
Investments suffered last year with the negative economic conditions caused by high inflation, rising interest rates, and the war in Ukraine all having an impact on portfolios.
Inflation
Inflation figures have continued their downward trend from their peak around last September. In the US, core CPI dropped to 5.7% over the year to December 2022, driven by falls in petrol prices. While inflation last year was relatively higher in Europe and the UK compared to the US, it’s moved in the right direction, falling to 9.2% and 10.5% in Europe and the UK respectively.
UK food prices remain very high – increasing 14.6% in 2022. This, coupled with rising mortgage costs, is clearly squeezing wallets and UK consumer confidence has plummeted to record lows. New ONS data shows that UK retail sales volumes fell by 5.7% over Q4 but sales values rose by 4.5%, with consumers paying considerably more in return for fewer goods.
While inflation is heading in the right direction, it’s still significantly above the 2% long-term target. As anticipated, the US Federal Reserve held a meeting on 1st February and raised rates by 0.25%, while the European Central Bank and Bank of England met a day later and increased rates by 0.5%. There’s a risk to bond markets if central banks are more aggressive than expected. Central banks need to slow inflation down further and will be nervous about taking their foot off the brakes in case it starts surging upwards again.
Interest Rates
The message we hear from most investment managers is that interest rates will peak this year as long as inflation continues to reduce. Whilst a recession is possible, markets can react differently to the economic conditions and there are reasons for being cautiously optimistic. For example, since the start of the year, the FTSE 100 has risen by over 3.7% and reached its all-time high in early February. At the same time, global stock markets have also followed a similar rising trend, providing a helpful recovery to investment portfolio values.
Investment Markets
We expect there still to be volatility in investment markets and portfolio values this year, but not to the same degree as in 2022 and we would expect to see a better year for our client’s investments.
The investment fund managers that we select are looking beyond the headlines and are concentrating on meeting their fund objectives over both the short and long term. We continue to believe that our investment approach of holding diversified, managed investment funds will help to provide strong long-term returns to our clients. If you have any questions, please let us know.
Year End Tax Planning
The tax year end is fast approaching and now is the time to consider whether you’ve used your allowances for the 2022/23 tax year. There are changes coming for the 2023/34 tax year, particularly around Capital Gains and Income Tax. If you want to talk about this in more detail, please contact us.
Henderson Loggie Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
Past performance is not indicative of future results and no representation is made that results where stated, will be replicated. Investment values rise and fall and the value of them is not guaranteed. On encashment, you may not get back the amount invested.