Published: December 2023
Markets improve as interest rates settle
It finally happened! It really does now look like interest rates have peaked at last. Barring any sudden shocks, they look highly unlikely to go up again any time soon. As a result, stock and bond markets are delivering better results than we’ve seen for some time.
Central banks the US Federal Reserve and Bank of England left interest rates unchanged at the start of November, as inflation cooled on both sides of the Atlantic. There were comments about rates staying higher for longer, but the general market consensus is they won’t rise further.
Investor confidence increasing
Most of this year has been defined from an investment perspective by rising interest rates and inflation. Higher rates encourage people to save rather than spend while raising company borrowing costs, which all hits profits and share prices. Rising rates can also dent existing bond returns by making new bonds more attractive.
This made investors rather edgy for much of the year. But with inflation falling and interest rates peaking, their confidence is increasing.
It’s not just about rising prices though. Another important factor heartening investors is the all-influential US economy remaining robust. A strong jobs market there means people still have jobs and money to spend. There’s growing optimism about Europe too, where the relatively weak economy is showing early signs of stabilising.
Lilian Chovin, Head of Asset Allocation at Coutts, the bank behind the Royal Bank Invest funds, says: “The scene is now set for markets to remain relatively positive until the end of the year. Risks remain though, such as high budget deficits and weakening jobs markets in many western countries, so we continue to monitor developments closely.”
Positive positioning in our funds
The experts at Coutts, who constantly keep a close eye on market dynamics, had seen the potential for the tide to turn in markets. As a result, they had already made changes within the Royal Bank Invest funds to reflect the brighter mood.
Within recent months, they bought more global stocks to benefit from improved market performance, and reduced their exposure to US government bonds.
When will UK interest rates fall?
Markets were mostly unaffected by UK Chancellor Jeremy Hunt’s Autumn Statement last month, largely because there were few real surprises.
The government’s National Insurance reductions and tax breaks for businesses were perhaps another sign of more positive times ahead though. The Chancellor’s moves to give people more money to spend show greater comfort with current inflation levels – their announcements would have been unthinkable earlier in the year.
It’s fair to say that challenges remain for the UK economy, however. UK GDP has been fairly weak for much of the year, and the Office for Budget Responsibility now expects it to grow by just 0.7% in 2024, down from its previous forecast of 1.8%.
So what does this all mean for interest rates?
Lilian says, “We believe UK inflation should continue to fall this year, offering some respite for investors, but the government’s recent tax cuts may slow its decline, giving the Bank of England another reason to keep interest rates higher for longer.
“So while an interest rate cut was widely expected in mid-2024, it might not come now until late next year.”
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