Money matters

Interest Rates - Investment Outlook 2024

Global markets recovered well towards the end of 2023. And with some central banks pausing interest rate hikes towards the end of last year, there are signs that they may have reached their peak. So, what does 2024 hold for financial markets? And where should investors look for opportunities?


Section 1

Interest rates

Interest rates settle and US economy stays resilient

For investors, last year was all about central banks battling to bring rising inflation back down by hiking interest rates. This created a challenging macroeconomic environment for investors at the start of 2023.

Company profits are hit by higher borrowing costs when interest rates rise, as well as people being encouraged to save rather than spend. And existing bonds become worth less as new bonds come with higher yields. So higher interest rates can be bad for both stock and bond markets.

The (re)balance of growth and inflation

But generally, central banks made good progress rebalancing the global economy as the year went on, and financial markets were more positive by the year’s end as inflation continued trending lower to much more benign levels.

The US economy – the most important for global investors – proved incredibly resilient during the year – surprisingly so – despite the US Federal Reserve (the Fed) raising interest rates by 5.25% between March 2022 and July 2023. The UK, on the other hand, saw much more sluggish economic growth.

The reason for the difference? Mortgages played a big role. 

Interest rate sensitivity of the mortgage market

Generally, mortgages are a key route for higher interest rates to help control inflation. Central banks raise rates, mortgages cost more, people have less money to spend and inflation drops – as does the pace of economic growth. This chain of events was more noticeable in the UK as the mortgage market structure is more sensitive to interest rates. There’s a prevalence of two and five-year fixed rate mortgages in Britain, so lots of people needed to renew and therefore felt the effect of higher rates.

But in the US, it’s common for mortgages to be locked in for 30 years, so the interest rate changes mostly impacted new buyers. Many people who fixed their mortgages while rates were low still had money to spend. 

Central banks hit pause

In the summer of 2023, central banks finally took a break from raising interest rates, although reassurance on this front came towards year-end as inflation declined. US inflation fell from 9.1% in the summer of 2022 to 3.2% in November 2023, some of which reflected the Fed’s intervention taking effect.

This heartened investors, partly because history shows that market conditions can improve significantly once interest rates stop rising. The graph below shows how US stocks have performed around the final rate hike by the Fed in previous rate-hiking periods. Performance is usually flat in the build-up to that last hike but, if the US economy avoids falling into a recession afterwards, stocks perform pretty well the following year. 

Could US avoid recession?

It is worth stressing, though, that returns are much more muted when the US has gone into recession afterwards. As for what’s going to happen this time around, we believe the US could avoid a recession or have one that’s only relatively mild.

Bonds look more attractive

The greater certainty we’re seeing on inflation and interest rates means bonds are looking increasingly attractive as well, after two challenging years.

It’s first worth noting that bond yields (the fixed income you get from a bond) and their price (how much you can buy and sell them for in markets) have an inverse relationship. If yields go up, prices go down.

Attractive bond yields

At the time of writing, US government bond yields are around 5%. This means if yields don’t change, an investor will get a return of 5% over the next 12 months. But this would change if the yield moves in either direction.

The table below shows what could happen to bond prices if yields were to change. If yields were to go up by 1% over the course of a year, which we think is unlikely, the 12-month return on the bond (including coupons) would be expected to be -2%. However, if yields fall by 1%, the 12-month return would be expected to be a considerable 12%.

Currently, with interest rates near, or even at, their peak, we expect bond yields to fall further this year and therefore, prices to rise. And if yields were to fall by 1%, an expected return of around 12% would be greater than what cash rates are currently offering.

Investment Outlook 2024

View more insights from this year's investment outlook. 

Investment Outlook 2024


Our Investment Outlook 2024 sums up the issues that affected the global economy in 2023 and looks ahead to where the best prospects of 2024 might lie. 

Corporate earnings 

Section two

Despite the US economy showing resilience in 2023, corporate earnings announcements (where companies release their quarterly performance figures) haven’t been as positive.

While companies have mostly managed to remain profitable, growth has been stagnant, which was to be expected against a backdrop of rising interest rates. 

Asset allocation

Section three

With everything mentioned so far taken into consideration, our funds are positioned to lean into the positives while also earning the bond yields that come in a higher interest rate environment.

Within bonds, we’re earning 4-6% yields from the global government and corporate bond markets at the time of writing. We’re also benefiting from higher sterling corporate bond yields, which we bought into opportunistically in 2023. 

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