The world has seen its fair share of events over the past few years and although 2024 was politically challenging, it was a year which saw markets respond well to changing expectations with regards to inflation and interest rates.
The aftershock of the Covid pandemic and the war in Ukraine led to sharp price rises around the world, and although still increasing, the pace of inflation has moderated. When prices rise slower, people can plan their budgets more effectively which encourages spending and investment which in turn fuels the economy.
Although the Bank of England’s target rate for inflation is still 2%, November saw inflation push up to 2.6% but dropped to 2.5% this January. There is an expectation that the Bank of England will cut interest rates 2 or possibly 3 times this year.
The UK economy is forecast to expand faster than its European peers. Rachel Reeves’ October Budget outlined spending boosts, and the recent plans set out by UK’s Prime Minister Keir Starmer for the use of more artificial intelligence (AI) to help boost growth, suggests positive planning of the UK’s local economy.
European shares moved sideways in 2024, significantly underperforming the US on the back of low growth and political uncertainty. Small and medium sized companies are undervalued significantly in comparison to their historical values, and we feel we are well positioned to benefit when the situation normalises.
In the USA, President Donald Trump recently set out his policy platform focusing on tariffs, tax cuts, immigration curbs, and less regulation. The response from investors has been positive but they’ve acknowledged that although it may bring on some inflationary turbulence, it does suggest that global economic growth is expected to remain stable.
The Japanese equity market has had a rewarding two years despite a slight wobble in August last year. The Topix index is up around 40% since the beginning of 2023. Emerging markets in the Asia-Pacific regions however have faced difficulty since the US Presidential election. Tariffs, a strong dollar and higher US bond yields have not been in their favour. Earnings growth is likely to be lower and valuations will be under pressure too.
It’s important to remember that world markets are affected by various factors and many of these are cyclical resulting in declines which are not only inevitable, but also temporary.
Historically equities have outperformed cash by a significant margin in the long run as can be observed from the graph below.
Source: Quilter Investors as at 30 September 2024. Total return, percentage growth over period 30 September 1994 to 30 September 2024. Based on an initial investment of £10,000.
