Analysis

By Alan Colquhoun

WITH half of the world’s population headed to the polls, 2024 was heralded as “the year of global democracy” but now, over halfway through the year, outcomes still remain unpredictable.

The drama of the US presidential election lies ahead, now with two markedly different candidates, and rich with possibilities to surprise and unnerve. In Europe, the French electorate voted in record numbers for right-wing Front National, but tactical voting in the election’s second round resulted in a shock win for the Far Left.

Meanwhile, in India, voters denied the ruling party an expected landslide – a sign, perhaps, that the economic miracle on the subcontinent has yet to reach many.

In contrast, the British electorate ejected the Conservative government, handing a landslide to Sir Keir Starmer’s Labour. It proved of no moment to markets, such was the clarity of the result many weeks before.

Alan Colquhoun: Which way will interest rates go in 2024?

Not for a decade has British political discourse seemed more predictable on the two great constitutional concerns that have long unnerved investors: our relationship with Europe was scarcely mentioned by any party, while a second referendum on Scotland’s place in the Union seems unlikely for a generation.

Much will be said of the durability of new-found political stability, however, and while other democracies cobble together coalition deals, or debate the legitimacy of power, Britain’s reputation for stable government seems restored.

Throughout the early months of 2024, fervour for US tech continued to drive the markets. Although we remain in the early stages of the transformative change artificial intelligence can bring to economies and companies, how quickly this translates to profits for shareholders remains a lingering concern.

Recently, we have seen a spike in market volatility, with a group of technology stocks wavering. Even the most vibrant companies with the most revolutionary products can prove to be poor investments if their valuations become too stretched or their delivery falls short of lofty expectations. In the US, such was the momentum behind a small number of gargantuan companies that posted double-digit gains inside a few months, while most index constituents tracked sideways.

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Corrections in markets are not merely normal, but fundamentally healthy. Equity prices cannot forever continue an uninterrupted upward trend. If they could, there would seldom be opportunities for patient investors to capitalise on mispricing.

We believe in the long-term capabilities of the companies that we invest in, a number of which continue to generate profit at a rate hitherto unseen in the history of capitalism. But we are conscious of changing economic projections, and the need to remain appropriately diversified.

However, narrow market leadership is no mistake, and we expect many recent “winners” to continue to drive outsized returns for clients.
Since the great financial crisis, many have assumed an unbroken relationship between interest rates and stock markets. More than a decade of cheap money turbocharged equity prices, as investors countered paltry returns on bonds and cash by buying shares instead.

The lower rates fell, the more investors were willing to pay, hence their collective despair when stubborn inflation necessitated rate hikes throughout 2022.

But we remain astonished by how short many investors’ memories seem to be. Central banks aggressively cutting interest rates is usually an indication of their worries of wider economic peril as they encourage us to borrow and spend, so we remain quite content with elevated interest rates, provided growth continues at home and abroad. And to those who pine for lower rates to elevate valuations, we simply say: be careful what you wish for.

On the domestic front, since assuming office, the UK’s new Chancellor has stressed the need for fiscal rectitude, and vociferously attacked her budgetary inheritance from the Conservatives. A rosier domestic growth picture does little to assuage the perilous state of the public finances, and recent agreement on public sector pay rises further heightened the Treasury’s need for cash, especially if we are to avoid a return to the austerity of the 2010s.

Given much was promised in the election campaign, especially guarantees to leave income tax, national insurance, and VAT untouched, there are few avenues to explore to raise additional revenue. Wealthier pensioners are clearly in the Chancellor’s sights – further taxes on assets, or removal of state support, seem possible.

The disparity between income and capital gains taxation might prove irresistible for a Chancellor keen to appear to target the wealthy, as might an inheritance tax raid on wealthy estates. We believe prudent savers will be proactive in seeking advice on such matters.

Alan Colquhoun is a relationship manager at Julius Baer