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Ask the experts: The inflation outlook

Ask the experts: The inflation outlook - Fund managers from Newton, Insight and Walter Scott answer the questions puzzling investors in 2024.

Last year continued to see inflation – and efforts to curb it – take centre stage. After many successive interest rate hikes from the Bank of England (reaching 5.25% by end of 2023), the UK’s inflation rate had more than halved by October 2023 at 4.6%.1 That was its lowest level in two years.

Does this mean 2024 will see inflation abate further? What does it mean for your investments? We asked our fund managers and investment experts for their insights on the questions puzzling investors in 2024.

Will 2024 see the economy go back to ‘normal’?

No.

“We believe that the next decade will be unlike anything we have lived through before. We cannot just rely on historical models and data, or experience alone, to navigate this new market regime of higher-for-longer inflation.”

Mitesh Sheth, Newton Investment Management

Will inflation go away in 2024?

Unlikely.

“For 20 years we enjoyed a very benign inflationary environment and, for many of us, inflation wasn’t a major worry. That all changed in 2021. Now, a return to the low levels of inflation and near-zero interest rates, to which we’d become accustomed, seems highly unlikely.”

George Dent, Walter Scott

Has inflation peaked?

Most likely.

“Overall inflation appears to have peaked, though regional variations and scope for periodic volatility remain.

Core inflation – which typically excludes things like food and energy prices – has been slower to fall but is now trending lower in the UK.

In most countries, inflation remains above central banks’ target rates – in some cases, substantially so. Wage growth, which has lagged inflation for some time, has generally risen and may prove sticky. This may delay the lowering of interest rates until the middle of 2024.”

Gareth Colesmith, Insight Investment

What about interest rates?

I think that coming back to a ‘normal level’ for interest rates, is highly unlikely, given the geopolitical backdrop. Inflation is going to be stickier because supply chains are still broken post-Covid and owing to the ongoing war in Ukraine. As a result, these new security priorities mean that money is less likely to be spent as efficiently as it used to be.”

Euan Munro, Newton Investment Management

Will there be a UK recession?

It might not matter…

“Recession or no recession, the economic backdrop is likely to remain challenging in 2024. Higher-for-longer interest rates will continue to test consumers and already stretched company balance sheets. Businesses that are cash generative and have low levels of debt, defendable market positions and strong brand propositions should fare better than most.”

Murdo Maclean, Walter Scott

OUTLOOK ON FIXED INCOME

Declining inflation – a positive influence?

“There are contrasting influences on fixed income markets. For government bonds, declining inflation and a soft economic growth outlook could help push bond prices higher and yields lower. Still, any return to the prepandemic lows of near 0% inflation appears unlikely.

Weaker growth could present challenges for corporate profitability, but the overall yields available in credit markets are likely to remain attractive.”

Adam Whiteley, Insight Investment

Government bonds could offer diversification

“Overall, we believe bonds are buyable again. Both in terms of their potential to generate returns and for diversification.

In broader economic terms, the real-world impact of higher interest rates isn’t quite biting yet. We expect to see its effects starting to take hold into 2024.

This could create an environment in which equities don’t do as well. In this scenario we think government bonds should offer better diversification.”

Paul Flood, Newton Investment Management

OUTLOOK ON EQUITIES

Cautious on growth

“I think there’s opportunities in the equity market if you’re buying into the less aggressively priced equities (i.e. cheaper). People have been piling into the growth stocks – largely in the technology sector.

A small number of tech stocks are at huge valuations, driving the overall market up. We believe investors should be very careful about entering into expensive stocks.”

Euan Munro, Newton Investment Management

More dividends

“The last time inflation was a major problem, in the 1970s and 1980s, strong returns came from dividends. Income stocks have historically outperformed during such periods.

Although corporate margins have improved, companies have been distributing less to shareholders than they did historically. In our view, that needs to change.

As we enter 2024’s challenging economic environment, corporates need to offer more value to shareholders.

The days when companies could spend as much as they like on whatever they want are behind us and we expect to see them tighten their belts. The age of extravagance is over.” 

Jon Bell, Newton Investment Management

1 Office for National Statistics (ONS).

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