Market Review 2023 and Looking Ahead to 2024
Published / Last Updated on 22/12/2023
During Covid-19 ‘Lockdown’ with the amount of government borrowing for covid debt, we forecast that inflation would be needed to devalue £500bn worth of government debt and we set a forecast of 5% pa for a 10-year period that would devalue government debt by 63% and with inflation then running at 2% pa for another 15 years, government debt would be reduced by 85% at year 25.
We warned you then of interest rate rises to come to bring inflation down and that you should remortgage and lock in at lower rates or prepare for the higher mortgage costs to come. This all came true but none of us could forecast the market shock event of Russia invading Ukraine and the subsequent energy crisis pushing inflation above 10%.
This has been good fore devaluing government debt at a faster rate but bad for all our pockets with increased costs of living, mortgage costs and rental costs.
2023 in Review
- CPI inflation in February was 10.4% pa, this was then down to 3.9% pa in November and is forecast to fall further with interest rates being maintained.
- RPI inflation in February was 13.8% pa (an arithmetic mean rather CPI’s geometric mean), this has since fallen to 5.3% in November and we believe a more accurate figure on real costs of living as it includes housing costs and is a truer reflection, in our opinion, of what we are all spending.
- Bank of England interest rates increased from 0.1% pa in lockdown to 3.5% pa in February and now 5.25% pa. The Bank of England suggests that this will remain in place for most of not all 2024.
- Stock markets bounced around from highs to lows and are climbing back.
- Bond market (your fixed interest and index linked funds) capital values have fallen in value due to interest rate increases but are now recovering.
2024 Looking Ahead
- Inflation will remain stubborn, and we can only assume that inflation may remain stubborn as shipping is routed away from the Red Sea/Suez Canal offering delays in delivery of oil, materials, and goods from the Far East.
- The UK economy is likely to fall into recession.
- Interest rates will remain high, but we suspect rates may be reduced in Autumn 2024 at the earliest to stimulate the economy if recession does take hold.
- If inflation does slowly edge down interest rates may fall and certainly, expectations of interest rate cuts will dominate.
- Expectation of interest rate cuts will push stock markets to new highs. We have already had a taste of this with FTSE 100 hitting a record high, French CAC, German DAX, US Dow Jones, and US S&P 500 all hitting new records in 2023 and we expect something similar in 2024.
- Chinese and Hong Kong markets have taken a real hit in the last year, is it time to ‘buy in low’?
- Inflation falling and interest rate cut speculation will stimulate recovery in the capital values of bond markets. These are where your fixed interest and index linked funds invest and look set to rise.
- Taxation is higher as our allowances are frozen (or reducing) and in Scotland it is worse as the Scottish government has already confirmed tax rises. You need to make use of all your income tax, inheritance tax, capital gains tax and dividend allowances.
- Capital gains tax allowance reduces from £6,000 pa to £3,000 in April 2024, use it or lose it. Consider investing more in pensions (for tax relief and tax-free growth) and insurance investment bonds (rather than shares, general investment accounts, unit trusts and investment trusts) as bonds have tax privileges that can help reduce capital gains tax.
- Dividend allowance reduces from £1,000 to £500 in April 2024, use it or lose it. Consider investing more in pensions (for tax relief and tax-free growth) and insurance investment bonds (rather than shares, general investment accounts, unit trusts and investment trusts) as bonds have tax privileges that can help avoid dividend taxation.
- The Conservative government completely abolishes the pension Lifetime Allowance (LTA) from April 2024. If you have high value pensions worth more than £1m, then get some advice as the Labour party (likely to be elected in late 2024) has committed to reintroducing the LTA or possibly some other form of wealth tax if it becomes troublesome to reintroduce the LTA.
Overall, we are hopeful for 2024 but there are so many risks for shock events that may pull us away from a return to a normal economic cycle that we have been hopeful of for many years. Fingers crossed for a return to normal economics.
