The Artificial Intelligence (AI) theme was a key driver of performance in 2023 with firms such as Microsoft and Nvidia battling to be the market leader of the technology. Both firms have greatly benefitted from the AI “bubble” and this week Microsoft overtook Apple as the world’s largest company by market capitalisation. Currently standing at a valuation of $2.9 trillion, the firm is the largest investor in the popular ChatGPT application and have been adding AI into Microsoft products such as Bing search engine.
UK inflation has been on a sharp decline from its high of 10.4% in February 2023, however for December 2023 (data released on Wednesday) we saw headline inflation rise for the first time in 10 months. Surprising economists, CPI rose to 4% from 3.9% and was higher than the expectation of 3.8%. Core inflation (excludes food and energy prices) froze at 5.1%. Following the last Autumn statement, there was a rise in tobacco duty at the end of November and this has been reported as the key driver of inflation, adding 0.1%. Intriguingly, only 12.9% of the UK population (aged 18 and above) smoked cigarettes over the past year, a record low proportion as the UK Government continue to tackle smoking prevalence.
Finalised inflation data from the Eurozone was released late Wednesday morning. Headline inflation as expected rose from November’s 2.4% to 2.9%. Core inflation fell in line with market expectation to 3.4%. The European Central Bank (ECB) stood firm on their decision to pause interest rates as they did not expect inflation to fall as quick as investors had hoped. Wages in the eurozone have now been singled out as the largest risk to the fight against inflation as market expectations for 2024 are 4.3%. As wages increase, costs for firms increase and this cost is then passed through to the price of goods and services, hence pushing up inflation.
Germany are leading exporters of machinery and vehicles however prevalent inflation, high energy prices and falling global demand has led to the economy contracting -0.3% over 2023. Europe’s largest economy did manage to avoid a recession as GDP over Q4 2023 was flat, recovering from the negative print in Q3. Economists do not have an optimistic tone on 2024 for the country as they estimate energy prices will have to halve in order for the country to regain competitiveness, something that is seen as unlikely to happen.
UK retail sales were released just this morning and the falls were alarming. Retail sales (year-on-year) for December fell -2.4%, a large deviation from investor expectations of 1.1%. Month-on-month, for December, they fell -3.2%, well below expectations of -0.5%. This is the worst monthly drop (excluding the pandemic) since 2008 and again the fear of a recession in the UK has risen as we await Q4 2023 figures. British luxury brand, Burberry, have announced a fall in operating profits amid slowing luxury demand – further signs of consumers pulling back on non-essential goods. The sharp drop in figures is likely to be taken as good news to investors, sales are dwindling due to the restrictive monetary policy, and this makes the chances of interest rates cuts occurring more likely.
If we look across the Atlantic to the US, retail sales tell another story as sales rose in December (month-on-month) 0.6%, above forecasts of 0.4%. This was boosted by increases in car sales and online purchases. The US economy is still strong, unemployment remains low, and wages are now rising above inflation. All this has made investors question whether the expectation of interest rate cuts starting in March 2024 was a little premature. As a result of this, we have seen weakness in the US bond market along with small cap equities, which are often the most interest rate sensitive parts of the market. Fed Governor, Christopher Waller, said the US Fed would be “moving carefully and methodically”, not giving away any indications on monetary policy.
Data from China this week showed their recovery from COVID-19 continues to be bumpy. While the economy grew by 5.3% in 2023, growth in Q4 was very lacklustre, as the effects of the re-opening of the Chinese economy wain. The COVID-19 bounce is well and truly over, which could lead to limited growth in 2024 for the world’s second largest economy. Youth unemployment data, which hasn’t been shared for six months was now reported and showed youth unemployment at a little over 14%, lower than the high of 21% in June 2023. While China’s outlook is more precarious than it has been in many years, the stock market has heavily discounted this, with equity markets down over 50% for the last three years.
The bumpy start to 2024 continued this week with a mix of data helping to muddle views about inflation and interest rates. Focusing on single data points can be limiting; it is often better to focus on the trend. We continue to see the trend in inflation as lower, and this should be supportive for a wide range of asset classes in 2024.
Nathan Amaning, Investment Analyst.
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.