Monthly Investment Note: December 2023
We would like to wish all our client’s a very happy Christmas & Happy new Year and I would like to thank you once again for
continuing to place your trust in our services. MERRY CHRISTMAS & Enjoy the final note of the year!!
With Dasher, Prancer, Comet, Rudolf, and the rest, including of course the big man himself, all preparing for the big present drop, we start to look at winding down for the Christmas holidays, reflect on the years happenings and cast an eye on the possibilities for 2024.
In November, EU Inflation as measured by the Harmonised Indices of Consumer Prices (HICP) continued its downward trajectory to an average of 2.4% across the bloc with a range of -0.8% in Belgium to 6.9% in Slovakia. Ireland followed suit with lower inflation (3.6% to 2.5%) in the same period.
It’s fair to say at the moment, that the inflation story is starting to subside somewhat, with the Irish economy currently undergoing macroeconomic adjustments, such as reductions in GDP (-1.9%), GNP (-1.1%) and unemployment slightly rising to 4.8% (v’s 6% in the EU), all being attributed to the current ECB interest rate policy. Doing nothing with the interest rates at this stage makes sense as rates unchanged at 4.5%, are effective in impeding inflationary growth and indeed, successfully rolling inflation back closer to the desired 2% rate; the goal of the ECB monetary policy. In her speech, Christine Lagarde, stated categorically that no discussion regarding the roll-back of the ECB rate had taken place, as a specific signal to the markets not to expect rate cuts in early 2024….really!.. though you can imagine that some of the class must have had the odd quiet chat in the corners.
Across the pond in the US, we saw a very small reduction in the rate of inflation from 3.2% to 3.1% which was less than expected and which we read as flat. Like Europe, the Fed funds rate remained unchanged at 5.25% to 5.5% for the month of December. However, the commentary which emerged from FED President Jerome Power did nothing to quell the appetite of the equities markets which interpreted his comments as being “done with rate hikes”. That being the case, a re-pricing of equities has occurred and has led to a rally in November / December leading to a return year to date, of 21%.
The movement in inflation from 3% to 2% is exponentially more difficult economically, due to the more stubborn core inflation as the competing forces of high employment and wage inflation continue to drive prices to higher levels on the demand side and cost of goods on the supply side, in truth, it’s difficult to strike the right balance but the so-called economic soft landing does look like it might actually be possible in the US.
Looking to 2024, though both the ECB and Fed expressed their desire to hold interest rates higher for longer, as inflation approaches the 2% mark, it is entirely plausible that we could indeed see rate cuts in 2024. And the pressure to do so builds, given the level of debt across governments. Remember last month’s note, I mentioned the level of interest payments on the US national Debt was similar to the whole National Defence budget (ca. €1Tn)…..seriously!!…
Turning to US Treasury yields, we continue to observe changes in the yield curve dynamics once again and are putting these down to trading. The 2 year and 20 year bonds are now yielding 4.37% and 4.21% respectively (both down from October) while the 5 year and 10 year bonds are yielding 3.9% and 3.92% respectively (also down since October). So, the transformative change in the risk-free rate has now moved to stage two. Short dated bonds continue to pay a higher yield than the average dividend yields for stocks, and that being the case, the yield drops have also resulted in positive capital gains for bonds in portfolios for the short period….Not bad for the so-called risk-free asset.
Next to oil prices, not quite hitting the predicted prices of $100 Plus per barrel this year, (there is always one!!) but having hit the lofty early $90’s per barrel earlier in the year, prices have for now settled back to $77pb (at time of writing) a swing in correction of ca. 10% over the past month. I mentioned last month that oil supply chains having been re-engineered since COVID, but remember the ship that got stuck in the Suez Canal and the implications of the delay to world trade, in getting it dislodged? Well, it looks like the shipping merchants are now being held hostage on this occasion, by the Iranian backed Somali Houthi Pirates in the Sea of Arden, so much so, that Maersk, MSC and Hapag-Lloyd who account for ca. 50% of global trade transportation, have decided to halt using the Red Sea for the time being until a suitable coalition naval protection force is put into place. I mention this because, BP, one of the worlds biggest oil producers has halted Oil transportation through the straits on the same grounds. So, taking into account COP28, the brutal razing of Gaza which is infuriating the Arab nations, , OPEC plus politics, and the war in Ukraine, there remains a substantial credible threat to global oil supply, driving prices and supply side inflation. Indeed, increased inflation pressures could also be seen where the biggest shipping companies decide to no longer use the Red
Sea trade routes…..there is much to be wary of!
Setting macroeconomics aside, what does all this mean for investors?
Well, year to date, returns from global equities markets are ca. 19.3% which is up from October, driven in large part by the aforementioned US Market expectation that interest rate cuts are on the cards in early 2024. European Equities have recovered their recent shock in September to deliver ca. 15.5% since January, while US equities delivered ca. 21.4% and Japanese equities 15.3%, all in Euro terms.
Looking forward, we are seeing forward price / earnings ratios (one of our measures of value) moving once again away from long term averages with global equities trading at 16.5 times (increased from October), European equities at 12.0 times, Japanese equities trading at 14.4 and US equities trading at 18.7 times their forecast earnings. One notable feature of the US market at the moment is the returns showing in the equal weighted factor funds. This suggests that marketeers are on the hunt for value stocks looking beyond the magnificent seven (AMZN, GOOGL, AAPL, MSFT, NVDA, META, and TSLA).
The long-term forecast for growth in global stocks has been elevated slightly up to 10.6% with an average yield of 2.3%. This puts the equity risk premium which is the Forecast growth – the risk-free rate, at ca. 6.3%, nonetheless, current conditions still continue to also drive fund flows into the money markets which are currently yielding ca. 3.9% and which are now a component of many portfolio’s.
As always, we take the long view on Investments and are happy with globally diversified portfolios. In today’s (relatively) high or normal interest rate environment, we continue to see fair value in across global equities (fPE’s at 16.5). We have seen a small resurgence in equities driven by the perceived ECB and US monetary halt in future interest rate rises, which may (or may not) come to fruition and the acceptance that rates will likely not fall to any great extent until late in 2024 at the earliest. Our view, on global bonds has also remained as per last month. As mentioned, the US 10 year treasury is now yielding a reduced yield of 3.92%, which is still attractive when compared to the average dividend yield of 2.3% for risk assets but not as attractive as some money market funds which are also paying the 3.9% yield and higher liquidity. Therefore, with bond yields at current levels, and interest rates probably plateaued, this asset class continues to look more attractive, than in recent years. Our cautious view on lower volatility portfolios continues to be implemented through the use of money market funds, currently yielding ca. 3.9% and hedge fund positions to exploit market inefficiencies; all in all, providing some degree of protection in the current volatile climate.
Sources: Central Banks: Federal Reserve, ECB, CBOI, Sharepad®. Euro Inflation is measured by the Harmonised Indices of Consumer Prices (HICP). Periodic Market updates & reading materials from Vanguard, Bloomberg, Ruffer, Davy Select & others depending on subject matter. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.
