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Market Update – January 2024

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Following the rallies towards the end of 2023, most global markets have taken a slight downturn this month as festive optimism wears off. The US has bucked the trend, driven by a small handful of tech stocks.

The US has also recently approved the listing and sale of a range of cryptocurrency ETFs, dividing critics and raising questions over the legitimacy of crypto as an asset class. We explore this in greater detail below, along with the active/passive investment debate and general themes to be aware of as we enter 2024.

Key Themes for 2024

Following over two years of spiralling inflation and some of the steepest interest rate rises in recent history, there are indications that things are somewhat returning to normal as of early 2024. Inflation has fallen from its peak and is currently sitting at a high (but improved) level of 4.2% and the general view is that the Bank of England (as well as other central banks) will cut interest rates this year.

2023 saw the highest stocks rally since 2019, mainly resulting from the meteoric rise of tech companies.
However, we have not yet seen the full impact of the inflationary crisis and the aggressive monetary tightening that followed. Central banks face an important balancing act – keeping inflation under control without stifling growth and potentially causing a recession. It remains to be seen whether they have achieved this.

The following factors also bring an element of unpredictability which is outside the control of economists, but nonetheless could have a major impact on markets:

  • Geopolitical conflict
  • Global health
  • Climate change
  • Upcoming elections in the UK and US

Are Markets Still Efficient?

Many people in the investment world have an opinion on active versus passive investment strategies. Active investment styles offer a chance to beat the market, although this usually comes at a cost. Passive strategies have grown in popularity due to low charges and relative predictability depending on what is happening in the market.

The efficient market hypothesis tells us that as all of the information that could impact a share price is already in the public domain, it is already priced in. The theory is that it is impossible to outperform the market over the long-term through stock selection or timing trades. Despite this, many investors, including professional investment managers, prefer an active strategy and the opportunity to generate ‘alpha.’

Recent data from Morningstar indicates that passive funds have overtaken active for the first time. However, new data suggests that the prevalence of passive investments actually reduces the efficiency of the market. This is because investors will buy into companies purely based on market share rather than any analysis of the quality of the company. This may reduce ‘shocks’ in the market, but it also creates scope for active investors to find opportunities in under-invested areas.

Clearly there is a place for both active and passive investment strategies. But the world changes, and with the evolution of technology, easier access to investments, and a wealth of market data at our fingertips, it’s likely that investment theories will need to evolve as well.

Crypto ETFs

If you have been following the news around cryptocurrency ETFs, you may be a little confused. Earlier this month, it was announced on the US Securities and Exchange Commission’s (SEC) X (Twitter) account that they had approved the first ever spot Bitcoin Exchange Traded Funds. This would allow retail investors to buy into Bitcoin via various investment platforms.

However, within minutes, it was identified as a fake post which was placed by hackers.

But within a day, the SEC announced that they actually did approve 11 Bitcoin ETFs for listing, including funds from well-known investment houses such as Fidelity and Invesco.

This follows months of debate, discussion, and a legal battle, as well as almost a decade of resistance by the SEC. Critics are wary of the move, pointing out that this will make it easier for inexperienced investors to access a highly volatile and controversial asset class. Some crypto advocates also feel that this detracts from the point of a decentralised currency by bringing it into the highly regulated mainstream.

The SEC have stated that they do not approve or endorse Bitcoin itself, but this message is likely to get lost in the wider media coverage.

Following the approval, Bitcoin ETFs saw inflows of just under $900 million in the first three days. However, within two weeks, the price of Bitcoin itself had dropped by 15%, demonstrating the volatility of cryptocurrencies.

The UK is an outlier in the global crypto market and has not yet approved the ETFs for listing or sale. Investors can, of course, buy cryptocurrency directly.

The UK Market

Following a reasonable rally towards the end of 2023, UK stocks have taken a slight downturn in January, with both the All Companies sector and the FTSE 100 (which turned 40 this month) dipping by around 1.2%.

Despite the optimism of falling inflation, the prospect of interest rate cuts, and improvements in economic activity, there are many areas of the UK economy which are still struggling. Corporate insolvencies have reached a 30-year high on the back of high production costs and slowing demand.

Top performing companies in the UK this month include supply chain partner Wincanton, trading platform CMC markets, and Alfa Financial Software.

The lowest performers include Watches of Switzerland Group and clothing retailer Superdry.

The Global Outlook

While most global markets have dipped slightly in January, the North American sector has produced returns of 2.1%.

The US economy overall grew by 3.3% in the final quarter of 2023, exceeding expectations. The Bureau of Economic Analysis has indicated that the US is on track for a soft landing and is likely to avoid recession. The S&P rose to a new high this month, although in line with recent trends, this has been driven by a handful of tech stocks.

The European sector fared less well this month, with a dip of 0.7%. While the Eurozone economy performed better than expected, both Germany and France experienced shrinking output and stifled growth. The region is still recovering from the energy crisis and has not benefited from the same level of fiscal stimulus as the US. However, inflation figures remain positive, with a rate of 2.8% predicted for January, a fall of 0.1% from last month.

The Asia Pacific region has faced a further drop of 3.4% this month, following an exceptionally difficult year. Chinese economic activity has continued to slow, with deflationary pressure, weak demand for exports, and low investor confidence remaining substantial threats.

Please don’t hesitate to contact a member of the team for more information on any of the topics covered.