No matter how hard I tried I couldn’t resist using the festive break to peruse some of the crystal ball gazing that appears at this time of the year. One observation stood out – investors, strategists and analysts are a miserable bunch!

The first paragraph of most commentaries might start by talking about how 2023 had been a pleasant surprise but quickly move on to lengthy discussions of the risks, the gloomy clouds on the horizon and rising geopolitical tension etc, etc.

Given my appalling track record I won’t bother readers with my own – cautious – takes for 2023 but I thought I might outline what constitutes a positive take on 2024. In short, what might go right based on existing trends? This positive take even extends to investment trusts where I have been notably bearish!

Optimists’ triumph

This burst of optimism is based on a simple observation, nicely summed up by the title of Elroy Dimson, Paul Marsh and Mike Staunton’s classic 2002 book ‘The Triumph of the Optimists’. The big message of this weighty tome is that over the medium to long term investors shouldn’t bet against equity markets’ relentless focus on progress and change. Of course, you can suffer losses in some years but that relentless march to a wealthier future, via equities, is one of the few things worth betting on.

Which brings us to the dying days of 2023 and the remarkable pivot when pretty much every measure of equity momentum turned bright green in those last few weeks of 2023. Analysts at Deutsche Bank in the US reported that flows into equity funds ($25.3bn) surged to nearly their highest in 21 months led by the US where $25.9bn poured in. Inflows had begun even prior to the Federal Reserve upgrading its economic forecasts on 1 November but clearly jumped after it, they said. The US stock market finished the year 24% higher.

Gerry Celaya, technical analyst at Cambridgeshire-based Tricio Advisors, puts it well when he says that ‘the S&P 500 doesn’t usually post big gains in a year and then collapse the next. It could happen of course, but it seems that momentum carries over into the next year to some extent. Another 20%+ year? Probably not, but positive returns closer to 10% or so would be in line with what we have seen in the past.’

How slow is the slowdown?

The obvious driver here is that inflation is falling, even in the UK, and that interest rates are likely to fall, at some point. It’s worth making the obvious point that you don’t tend to increase interest rates tenfold and not have an impact on economic activity, slowing it down and thus prices. There aren’t many iron laws in economics but that is as close to one as we get.

As for the management of market expectations, at least the US Fed is honest in suggesting that rate cuts are more not less likely. By contrast, who in the City believes Bank of England governor Andrew Bailey when he suggests rates might stay higher for longer – this from the organisation that for so long resolutely ignored the recent surge in inflation?

The next obvious question is how big the impact of higher-for-longer rates will be on the world economy? The markets are betting that any slowdown won’t be substantial and that at some point this year we’ll bottom out. Looking at the macroeconomic data points coming out over the last few weeks, it’s hard not to conclude that a) US consumers are still on balance confident and b) that the Chinese government, faced with a much more pronounced downturn than expected, will probably intensify its demand management response.

As for the UK, I have no idea whether we’ll avoid a deep recession or not, but I would observe that UK valuations are currently pricing in a sharp recession – anything less than that would be a positive surprise.

UK bid bonanza

Sticking with that UK point, one catalyst for rating revaluations might be a sudden uptick in M&A activity. Just before Christmas the London Stock Exchange reported that bids and takeovers with any UK involvement totalled $265.4bn (£208bn) in 2023, 33% less than the previous and the lowest year-to-date total since 2009 according to LSEG Deals Intelligence. M&A involving a UK target totalled $120.2bn, 45% less than the value recorded during the same period in 2022 following a 37% decline in domestic M&A and a 49% drop in inbound deals. 

The one bit of good news was that the fourth quarter numbers were a big improvement. The year ended with deal announcements worth $91.5bn in the last three months of the year, the highest quarterly total since the second quarter of 2022.  To put it as simply as possible, it wouldn’t be too difficult for M&A activity to improve in 2024 – we’ve had a few terrible years and it’s more likely than not that it can only get better from here on in.

I would highlight two other existing trends worth shining a light on market breadth and private assets.

Broader rally

The first is that as we all know most of the gains in 2024 came from a handful of stocks, whose names we all know by now. Yet analysts in the US noticed that by the end of 2023 the breadth of positive returns was increasing substantially, although smaller and most small to mid-cap stocks still seem left behind.

Towards the end of November quant analysts at French investment bank SocGen noted that prices of financial assets were surging across the board. The global 60/40 portfolio as calculated by Bloomberg leaped 7.6% in November, its best monthly performance since the announcement of the Covid vaccine in November 2020. They concluded that ‘the strength and uniformity of the rally suggest top-down over bottom-up repositioning. Yes, the low-beta sectors outperformed, and energy was a notable laggard, but most global sectors gained by 7-10% during November.’

This broad-based confidence even extended to emerging markets, with Indian equities for instance shooting ahead in 2023. It’s not entirely impossible that as confidence in financial assets solidifies in the US across mid and small caps and to a lesser extent other G7 countries, the vast swathe of the Global South might finally get a look in.

Globalisation isn’t dying

On this subject, I can’t help but point readers to an excellent piece by Gavekal Research’s Louis Vincent Gave who rubbishes the idea that globalisation is dying:

‘Today, the notion that the world is deglobalising would seem laughable to anyone living in Dubai, Singapore, São Paulo or Mumbai. Rather, the world is going through a new wave of globalisation, which is different from its predecessors. For the first time since Columbus sailed to the Americas the world is experiencing a wave of globalisation which does not require Western financiers, Western engineers, Western modes of transportation, Western currencies or Western technologies.’

I’ll leave you to think through the equity market implications of that shift.

Mention of emerging markets might also prompt some readers to feel anxious, especially as it prompts all sorts of geopolitical concerns. But again, don’t bet against the markets taking these geopolitical concerns in their stride. Liberum’s strategist Joachim Klement has produced a mountain of research which shows that geopolitics and the sudden eruption of Cassandra-like sentiment is almost completely irrelevant to long-term returns.

Boom in private assets

The other big trend that was intensifying in 2023 – and will probably continue into 2024 – is that the wealthy are switching en masse to private assets. I did manage to spend a few hours over the festive break reading through the long UBS Wealth Report. Sure, there are the oft-stated worries about private equity deal flow and indigestion from fundraising but the shift to all manner of private assets is relentless.

For example, looking at family offices last year, UBS reckons that global exposure to traditional equities and fixed income was at 46%, cash at 9% and all private assets at a stunning 45%. The numbers for private assets amongst private offices in the US were even higher. The boom in private assets isn’t going away any time soon.

Specialists well placed

That brings me nicely to our very own wealth sector, which as we all know is consolidating like crazy. That’s been terrible news for investment trusts – there are too many sub-scale trusts lurking around pitching to central research desks at big wealth managers who only really care about £1bn-plus liquid funds.

Partly as a result of this (and other trends) fund discounts have skyrocketed, but the private equity-induced consolidation phase will play out as all other consolidation phases in numerous other sectors have done before. As the big platforms get to dominate, they’ll squeeze efficiencies through the system, boost profit margins and then margins will plateau. To boost margins, the platforms will try and push up charges – or fight for scale by building lower-cost commodified alternative offerings.

I’d also wager that portfolio performance will be mediocre: mediocre performance and rising fees are a deadly cocktail. Unlike say the consolidating vet chains (another PE favourite), investors won’t stand for this double whammy and they’ll seek out new alternatives in the shape of smaller outfits that have spun out from the centralising platforms.

And so, the standard creative destruction process will restart as wealthy investors decamp from anonymous chains to idiosyncratic boutiques. And that might at long last help investment trusts!

A cheer for cheap trusts

Step back from this positive picture and I think we can see how the investment trust sector might rather look forward to 2024. London-listed funds – like London-listed businesses – are cheap and might benefit from that market broadening of momentum.

The investment trust market is also traditionally strong when it comes to funds in the private assets as well as the emerging markets space. Rates are likely to start coming down which will help alternative infrastructure funds. M&A activity is already picking up and might intensify as those consolidating wealth platforms force a winnowing out of funds.

We might even see new IPOs and investment company launches emerge in 2024 as the relentless march of the optimists finally arrives in London.

Who knows, maybe 2024 might even be a good year for the London based markets? Stranger things have been known to happen.

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